The Life Insurance Need Analysis is used to calculate the lump sum amount required to eliminate any expense shortfall that may occur in a plan following the death of either the primary client and the client’s spouse or partner. It is intended to show as a figure any life insurance coverage shortfall a person may have at a given point on the planning timeline, in order to evaluate how much additional cover that person may want to consider.
In plans for couples, married or in civil partnerships, the analyser will evaluate the possible additional life insurance cover needed for the primary client as well as that person's spouse or partner. A simulation will always be run for both persons.
When running a simulation from the Let's See screen, enter the number of years the person will remain living in the plan. In plans for couples, enter the number of years remaining for the primary client and for the client's spouse or partner. If you want to model an immediate mortality as of the start of the plan, enter 0 years remaining.
In the year following, the simulation will add a simulation mortality event (Sim Mortality) and does everything the software would normally do if the specified person were to die at a given point in the planning timeline.
- Benefit payouts are made from active protection policies.
- If the individual is actively employed at time of death and has death in service coverage, a lump sum payout will be made to the beneficiary. Payments from widow's pensions will also start being paid to the survivor.
- Lump sum payouts are made from Money Purchases.
- Survivorship and joint payout options are applied to drawdown pensions, annuities, depending on how you configure them.
- Payments may continue from final salary schemes that are in payment at time of death, depending on how the scheme is configured. Final salaries that are in deferment at time of death may make pension payments, return individual contributions, or pay out a lump sum benefit to the survivor, depending on how the deferred pension is configured.
- The deceased's estate is liquidated and distributed either by default to the the surviving spouse/partner or as specified on the Estate Plans screen.
- Bonds (onshore and offshore life funds) are liquidated and distributed to beneficiaries.
- Property/assets, if co-owned, will pass to the surviving spouse/partner. If the property asset is not co-owned it will be liquidated and the proceeds will pass through the estate distribution.
- Employment and other income earned by the deceased will end unless it is an Other Income source specially tagged "Income Survives Owner".
- Expenses, if owned solely by the deceased, will end at mortality.
Expense reductions following mortality
If an expense is co-owned it will continue in the plan at previously set levels. We make no assumptions about which expense should decrease since a plan might contain a mix of expenses, some of which might not be decreased. One's mortgage payment, for example, would not decrease whereas one's living expenses, in general, probably would.
If expense reductions are a concern, consider dividing between client and spouse any expenses that should be reduced automatically upon mortality. Indicate that these are personal expenses by selecting only one owner in the People panel to the right side of the screen. If the owner of the expense dies, that person's personal expenses will also end in the plan.
Otherwise, consider modelling early mortality in a scenario using a replacement mortality event and then run a Lump Sum Needs analysis. Though this figure is assumed invested as opposed to saved to cash.
Note: Although the life insurance need analyser is a quick and simple tool to use, you could instead model early mortality in a what-if planning scenario using a drag-and-drop replacement mortality event. There is a video on how to use replacement mortality events on our YouTube channel.
Once these liquidations and transactions are completed, the Life Insurance Need analyser simply runs a lump sum need analysis determine how much would be needed as a lump sum inflow at the selected mortality event in order to prevent any shortfalls from happening afterward in the cash flow.
Note: Preferred Payment sources set to "Only Allowed Preferred Source to Make Payment" can affect the simulation's ability to fulfill all shortfalls and will result in an unsolvable simulation, which usually manifests itself as an outrageously high sum as the need result.
You can view what is assumed to occur in the simulated mortality year, after running the simulation, by clicking the bar of the top or bottom chart in the year where the red simulation mortality event is positioned. The chart legend will appear. Click the Detailed Info link at the bottom of the legend to view additional transactional information for the year.
Notice that the chart only shows the potential problem, the possible shortfall following death. It does not show the resolution, as is the case with the other needs analysers. As a result, you cannot view where the additional lump sum - the result of the need analysis - is being deposited.
What Does the Software Assume is Done with the Lump Sum Inflow?
The lump sum inflow created by the life insurance needs analyser is deposited into the survivor's default cash account - e.g. Christine's Cash.
Each person in the plan has a default cash accounts (e.g. John's Cash, June's Cash), which can be viewed and configured on the Savings screen. These accounts are used to capture lump sum inflows that are not scheduled to be deposited to specific accounts such as savings, investments or money purchases. Funds deposited into default cash are always used as the first source for top-up income when other inflows have been exhausted and planned expenditures remain unfulfilled.
Funds deposited into default cash accounts or often grown using the default growth rate for cash/savings, which is set in Preferences > Plan Preferences (to the right side of the screen) > Default Inflation / Growth Rates > Savings Growth Rate%. Furthermore, the default fees for these taxable accounts are also set in Plan Preferences > Investment Fees > Taxable %.
However, the settings for these individual default cash accounts can be adjusted on Savings screen under Advanced Settings > Growth. There you will find the growth rate and fees applied to any cash placed on deposit in the account. If you adjust these settings, they will be applied to any funds deposited to the account, including the hypothetical deposit created by the life insurance needs analysis.
Special sweeps rules can also be set for default cash accounts. Selecting a default cash account (e.g. John's Cash) on the Savings screen, expand Advanced Settings and there you will find a special option to Annually Sweep Balance to Other Accounts. This special setting, which is available only for default cash accounts, allows rules to be set to automatically sweep any funds deposited into default cash into other accounts in the plan such as unwrapped investments, ISAs, savings, or money purchases.
If you set a sweeps rule for the survivor's default cash account, the lump sum created by the simulation will not be placed into default cash and grown accordingly; rather it will be swept into the specified target account(s) and grown using the assumptions for those accounts.
Sweeping Funds and Solution Errors when running the Life Insurance Need Analyser
A word of warning. If you have funds set to be swept automatically from default cash into another account, say an unwrapped investment, and have in turn set the account to disallow or restrict withdrawals (by using advanced settings on the Liquidation Limits / Planned Withdrawals) you might create a problem the need analyser is unable to solve. The result would be a simulation error. When running the simulation, the Amount Needed field would show a result of "solution error".
The same problem would occur if you were to have a sweeps rule set to move funds automatically into a special type of account that the software does not take ad hoc withdrawals from in order to top up income. These are accounts with special tax treatments.
Ad hoc withdrawals are never taken from:
- Drawdown Pensions (except for when drawdown income is set to be taken “as needed”),
- Trusts (other than Child Trusts and only in certain circumstances),
- Enterprise Investment Schemes,
- Venture Capital Trusts,
- Discounted Gift Trusts.
Normally you would need to set a drawdown to pull any funds from these accounts, however, having all funds automatically swept from default cash into one of these special account types will likely cause a solution error when running a needs analysis.
Another Common Cause of Simulation Errors - Restricting Expense Payment Sources
Another common cause of solution errors are expense payment sources. For expenses you have the option to specify whether a preferred source, usually a particular savings or investment account, should be drawn upon to pay a given expense before other possible payment sources such as incomes are taken into account. For example, if your clients are saving into a special fund to pay for their children's future university fees, you would likely set this account as the preferred payment source for these fees on the Expense screen > Advanced Settings > Expense Payment Source panel. There is no harm in doing this if needed. The software will draw first from the specified account when attempting to pay the expense and if the account does not have adequate funds it will draw from other sources.
There is an additional option on the Expense Payment Source panel to "Only allow preferred source to pay expense". This setting can create problems for the need analysers. By ticking this option you will prevent the software from fulfilling the expense from any source other than the preferred payment source. Use this option only very sparingly and we recommend only using it in what-if plans. It could be useful, for example, in testing a case to discover whether your clients are saving enough into that education fund to fully fund their children's future uni fees. Incomes and other liquid assets are taken out of the mix when paying these future expenses and if the account is being underfunded, shortfalls will be shown in the cash flow chart, usually above the black need line to note that then shortfall is an artificial one. Other income and assets are available but the software is not being allowed to draw upon them.
If you use the Only allow preferred source to pay expense" option and the account in question goes underfunded, the software will never be allowed to draw from other sources to pay the given expense. When running a needs analysis, this will result in a "solution error" because the software cannot find a solution to the shortfall. The life insurance and lump sum need analysers deposits funds into default cash accounts. The annual savings need analyser deposits funds into a hypothetical "needs analysis" account, modelled on an unwrapped investment. None of these simulations will place funds into a preferred payment source account, unless of course the preferred payment source is a default cash account. Incidentally, there would normally be no need to set a default cash account as a preferred payfor top-up ment source since these accounts are already the first source of cash withdrawals for top-up income, once the year's inflows are exhausted.