The capital retention approach is one of two methods of calculating your family’s life insurance needs under the family needs approach. It is not an independent approach. Rather, it is one of two ways to determine the lump sum of insurance proceeds the surviving spouse will need to receive and invest in order to take care of ongoing family income needs.
Under this approach, you estimate the necessary lump-sum amount assuming that you will be preserving insurance proceeds while providing income during the readjustment, dependency, blackout, and retirement periods. This way, you make sure that resources are still available to generate income should the surviving spouse outlive his or her life expectancy. Moreover, you preserve capital to be passed on to heirs when the surviving spouse dies.
Under the alternative capital liquidation approach, you don’t provide for continued capital availability for either supporting the surviving spouse indefinitely or inheritance by heirs after the spouse’s death. You get the advantage, though, of spending less on life insurance, since you require a smaller amount of life insurance proceeds at the insured’s death.
Why Choose the Capital Retention Approach?
You should focus on capital retention when using the family needs approach if you want to preserve life insurance proceeds, attend to ongoing income needs strictly through interest earned, provide income to the surviving spouse indefinitely in case the spouse outlives his or her life expectancy, and provide assets for the heirs to inherit. It is the more conservative of the two approaches. While offering your family some extra security, it also means that you must purchase more life insurance than under the alternative capital liquidation approach.
Strengths
- Less risky approach than capital liquidation: The capital retention approach guarantees that some or all of the insurance proceeds will remain available to support the surviving spouse if the spouse significantly outlives his or her life expectancy.
- Better approach for heirs: This approach enables your family to preserve capital in the form of insurance proceeds to pass to heirs after the surviving spouse dies.
Tradeoffs
- Requires spending more on life insurance than does the capital liquidation approach: To retain capital beyond the surviving spouse’s remaining life expectancy, you will need to spend more on life insurance than you would with the capital liquidation approach.
How to Use the Capital Retention Approach
Generally speaking, the family needs approach requires you to make the following calculations in order to estimate life insurance needs:
- Immediate needs at death
- Ongoing family income needs
- Expected other income sources
The following equation yields an estimate of the insurance you need:
Immediate needs at death + Ongoing family income needs – Expected other income sources = Family needs
Your choice of the capital retention approach versus the capital liquidation approach affects your figures for the insurance amount necessary to cover the ongoing family income needs. If you choose capital retention as opposed to capital liquidation, you will require more insurance proceeds to invest in order to cover the ongoing family income needs.
This is one of many ways to evaluate your insurance needs. If you have questions or need assistance, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosures: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
