Needs Analysis and Financial Planning Flashcards

A 45-year-old client has a mortgage of $320,000, a car loan of $18,000, and no other debts. Her spouse earns $75,000/year and would need income replacement for 15 years. Using the DIME method, what component accounts for the mortgage balance?

Answer: Debt elimination

In the DIME method, Debt refers to all outstanding liabilities including the mortgage balance.

Which of the following best describes a 'human life value' approach to determining life insurance needs?

Answer: Calculating the present value of the insured's future net earnings

The human life value method discounts the insured's projected future net earnings to a present value to determine the economic loss survivors would suffer.

A client wants to ensure his family can maintain their current lifestyle if he dies. After reviewing his financial data, the advisor determines existing assets and survivor income cover 60% of the need. The advisor should recommend a death benefit that covers:

Answer: The remaining 40% gap

The needs analysis identifies the shortfall between the total financial need and existing resources, so insurance should cover only the gap.

During a needs analysis, a client discloses she is a single parent with two children aged 8 and 10. Which financial planning priority is typically MOST urgent for this client?

Answer: Income replacement life insurance

A single parent's top priority is ensuring income replacement so dependents are financially protected if the parent dies prematurely.

When gathering financial data for a needs analysis, an advisor learns the client has a defined benefit pension that pays a survivor benefit of $1,200/month. How should this be treated in the analysis?

Answer: Added to existing resources that reduce the life insurance need

Survivor pension benefits represent existing resources that reduce the gap between total needs and what insurance must cover.

A client asks why her advisor collects information about her children's ages and education plans during a needs analysis. The BEST reason is:

Answer: To estimate future education funding needs as part of the total financial requirement

Children's ages and education plans help the advisor estimate future post-secondary education costs, which are included in the total needs calculation.

A client has $500,000 of existing life insurance through his employer. His needs analysis reveals a total insurance need of $1.2 million. His advisor recommends an additional $700,000 personal policy. The client argues the employer coverage is sufficient. What is the advisor's BEST response?

Answer: Explain that group coverage is usually not portable if employment ends

Employer-sponsored group life insurance is generally not portable, meaning the client could lose coverage if he changes jobs or is laid off.