Question

explain the capital retention approach for determining the amount of life insurance to own?

Answer 1

The Capital retention approach requires you to make the following calculations in order to estimate life insurance needs:

1. Immediate needs at death

2. Ongoing family income needs

3. Expected other income sources

The following equation is used to estimate the need:

Money needed by family = Immediate needs at death + Ongoing family income needs – Expected other income sources.

The main thing to note here is that the insurance proceeds under this method are retained and are not liquidated. They are further invested in income generating assets.