Needs Analysis: The Right Way to Size Life Insurance Coverage
A needs analysis (needs approach) calculates how much life insurance someone requires by totalling what their survivors would actually need money for, then subtracting the resources already available. The gap is the insurance amount.
It answers the practical question the human life value method ignores: not "what is this life worth?" but "what bills does death leave behind?"
Why it matters on the LLQP exam
Needs analysis is the method the CISRO curriculum treats as the professional standard, and scenario questions expect you to walk through it. The components:
- Cash needs at death — final expenses (funeral, legal fees, taxes, probate), emergency fund, and debt repayment (mortgage, loans, credit cards).
- Income needs after death — replacement income for the family during the dependency period (until children are independent) and for the surviving spouse afterward.
- Specific goals — children's education funds, bequests.
- Minus available resources — existing life insurance, savings and investments, CPP survivor benefits, employer group coverage, a spouse's income.
Needs minus resources = the shortfall the new policy must fill.
Exam traps: don't forget that CPP survivor benefits reduce the need; don't double-count assets already earmarked for retirement; and remember the analysis must be revisited — marriage, a child, or a bigger mortgage all change the answer. An agent who sells a round number without this worksheet is exactly what the ethics questions criticize.
Example question
A family's total needs at the breadwinner's death are $900,000. Existing resources (group insurance, savings, CPP survivor benefits) total $400,000. The needs analysis recommends additional insurance of:
- $1,300,000
- $900,000
- $400,000
- $500,000
Answer: D — needs ($900,000) minus available resources ($400,000) leaves a $500,000 gap to insure.
This pairs naturally with the human life value approach and coverage choices like the accidental death benefit rider in the life insurance hub.