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Start with the capital survivors would need, then deduct resources already available, including insurance already in force. The remainder is an estimate of additional cover needed under the stated assumptions. Only after that calculation should you compare the existing policy with a proposed replacement, because a different policy is not useful merely because its illustration looks cheaper.
Build the capital-needs worksheet
A capital-needs estimate separates immediate obligations from an ongoing income gap. Immediate needs might include final expenses and debt the household intends to clear. Convert the future support gap to a present value, then add separately identified future goals at their present values. Finally, subtract liquid resources genuinely available to survivors and the death benefit already in force.
The formula assumes equal payments at each year-end and a constant rate. Real cases may need different timing or changing support needs, so the exam task is to identify the assumption before calculating. CFP Board’s certification learning objectives explicitly include capital-needs calculations and replacement decisions using quantitative and qualitative factors.
An illustrative household calculation
All figures here are invented for teaching. Suppose a household would need $20,000 at each year-end for five years, discounted at an assumed 5% annually. It also identifies $10,000 of immediate expenses, $50,000 of debt to clear, and a separate $20,000 future goal already expressed in present-value terms. Available resources are $30,000 of earmarked liquid assets and a $40,000 existing death benefit.
| Income gap present value | $86,589.53 |
| Immediate expenses | $10,000 |
| Debt to clear | $50,000 |
| Future goal, present value | $20,000 |
| Gross capital need | $166,589.53 |
| Liquid assets and existing cover | $70,000 |
| Additional cover estimate | $96,589.53 |
The illustrative income present value is $20,000 multiplied by the five-year annuity factor at 5%, or $86,589.53 after rounding. Adding the other needs gives $166,589.53. Subtracting $70,000 of available resources leaves $96,589.53. This is an estimate contingent on the worksheet inputs, not a universal coverage amount.
Evaluate replacement after sizing the gap
The existing $40,000 benefit is already counted as a resource. Replacing that contract does not, by itself, add $40,000 of protection. Compare the current and proposed contracts at the same relevant coverage amount and examine premiums, benefit terms, exclusions, guarantees, cash value and any surrender cost. Check whether new underwriting, changed health or a gap in effective cover alters the result.
If a cash-value contract is involved, examine the tax and transfer mechanics before assuming that moving its value is neutral. CFP Board’s policy review education listing flags cost, suitability and tax implications as review points. A needs calculation and a replacement assessment are separate steps; neither alone settles the other.
The errors to catch
- Double counting. If debt is cleared as a lump sum, remove its payments from the ongoing income gap.
- Skipping present value. Adding undiscounted future payments overstates the capital needed under a positive discount-rate assumption.
- Forgetting current cover. The existing death benefit belongs among available resources unless its terms make it unavailable in the scenario.
- Comparing only premiums. A lower quoted payment does not establish that a replacement meets the same need on comparable terms.
The CFP program page places this work in its exam context. Use the study methodology to practise separating assumptions, arithmetic and the replacement judgement.
Sources
- CFP® Certification Learning Objectives · cfp.net · Retrieved
- The Modern Policy Portfolio — Review, Replace, or Repurpose · cfp.net · Retrieved
