Chapter 16 FUNDAMENTALS OF LIFE INSURANCE Methods for Determining the Amount of Life Insurance to Own • Human life value approach • Needs approach • Capital retention approach Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 16-2 Determining the Amount of Life Insurance to Own—Needs Approach • Estate clearance fund • Income during readjustment period • Income during dependency period • Life income to surviving spouse – During blackout period – After blackout period • Special needs – Mortgage redemption fund – Educational fund – Emergency fund • Retirement Needs Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 16-3 EXHIBIT 16.1 Improvements in Life Expectancy over the Past Century Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 16-4 EXHIBIT 16.2 How Much Life Insurance Do You Need? Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 16-5 INSIGHT 16.3 Life Insurance Study Reveals Crisis of Underinsurance Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 16-6 INSIGHT 16.3 (continued) Life Insurance Study Reveals Crisis of Underinsurance Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 16-7 EXHIBIT 16.3 Relationship Between the Net Amount at Risk and Legal Reserve Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 16-8