Needs Approach Of Risk Analysis
Another way to measure the size of the potential loss resulting from the death of Mr. Provider would be to assume his death and to calculate the needs for cash and income that would exist. The following are the major needs of the typical family.
1. Funeral and burial expenses
2. Outstanding bills at the time of death
3. Cost of estate administration, including court costs and legal fees
4. Estate, inheritance, and property taxes
5. Expenses of the illness resulting in the death
6. Continuance of family income sufficient to raise children
7. Life income for the widow after children have left home
8. Funds to pay mortgage or rent
9. Funds to provide for continued education of the children
10. Funds for any emergency expenses
The business firm also can enumerate certain needs for income or cash which would exist if its owners or employees should suffer death or disability.
1. Loss of credit facilities, causing increased costs of borrowing
2. Loss of sales
3. Forced liquidation of the business and thus loss of the going-concern value of the firm
4. Loss of special project results due to the loss of a key man The needs approach to loss measurement has the advantage of including both the cash and the income needs which arise because of death. It is also more easily adapted to include disability and retirement needs. Periodic change is required, however, to keep the estimate current.
Of the perils which can befall the family, the total and permanent disability of the income-producer is probably the worst. In this case, the loss is greater than that amount needed to support the family. It includes income to support the disabled breadwinner as well as medical and rehabilitation expenses. Yet the chance of long-term disability (e.g., longer than three months) is greater than death. At age 30, disability is three times more likely than death; at age 40 it is 2.3 times greater ;and at age 50 it is still 1.7 times greater.
Millions of dollars in wages are lost each year as a result of long-term and permanent disability. Furthermore, hospital costs exceeded $300 per day in 2008 and are doubling almost every five years, rising faster than almost any other element in the consumer price index. Temporary disability is far more prevalent than long-term disability, but the consequences are not as great. Nevertheless, personal expenditures for medical care consumed in excess of 6.6 percent of disposable personal income in 2008, and that percentage is steadily increasing.
The problems of building and maintaining retirement incomes have become so great that several social insurance programs have been developed to help guarantee at least a floor of protection for persons reaching retirement. Since 1950, medical research and better health care procedures have produced an overall increase in life expectancy of two years. Over 75 percent of everyone who reaches age 20 will live to age 65 or older. In addition, once a person reaches 65, his life expectancy becomes age 81. However, retirement can force a person to change his style of living if his income is insufficient to meet his needs. The individual who is retired or is facing retirement must cope with three major problems:
1. How to provide himself a monthly income large enough to meet his needs
2. How to be certain that his income and assets will not be exhausted before he dies
3. How to keep pace with increases in the cost of living, especially those due to inflation, when not receiving equivalent increases in income
Death, disability, and retirement are predictable for large groups from prior experience. The predictability allows private industry to offer protection against their occurrence. Unemployment has laid idle an average of approximately 4 percent of the work force since 1953. However, unemployment can be the result of a multitude of varied causes that make predictability impossible. Therefore, various government programs, chief of which is unemployment compensation, seek to provide some income assurance to persons unable to secure employment.