There are a number of assumptions that reflect a needs base approach to insurance cover estimating and we refer to it as estimating due to the fact that lifestyles are a forever changing dynamic.
One of the key measures that never changes is the need for income.
Assumptions of the Needs Approach:
There are a number of assumptions that I make when filling out the Needs Based
Approach.
- Forecasts are fair estimates of reality. I assume your forecasts are reliable estimates for the future.
- Forecasts for today's dollar estimates can be valid if we determine how many years in the future the money is needed, and we are close on our estimates for inflation.
- In calculating the annuity, we calculate the rate using the real rate of return less taxes, as this money will be invested in taxable accounts.
Our method for calculating the real after-tax rate of return is the nominal return times 1 minus the tax rate. This gives our after-tax rate of return. To calculate the real after-tax rate, it is (1 plus your after-tax rate of return) divided by (1 plus inflation), and the whole amount minus one. Note that the annuity assumes payment at the beginning of the year.
- Once you have your annuity amount, you can discount it back to the current time period by using your rate of return on your investments.
The Annuity Payment approach
The Annuity Payment approach is based on a Multiples of Income strategy across the DIME factor (Debt, Income, Mortgage and Final Expenses) whilst maintaining Cost of Living standards and converting the sum insured into either
Option A) _ Pay out all debt and live off the balance
Option B) _ Creating a life time annuity payment option for a Whole of Life position.
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