As shown in the other methods, different approaches are needed to reflect the fact that planning is very complex, although current methods rely on a static, predictable future and are based on rough calculations.
The Life Cycle Model of Consumption and Savings is a new approach based on the life cycle model developed in the 1950s and 1960s by Professor Franco Modigliani and his colleagues at the Massachusetts Institute of Technology. Modigliani won the Nobel Prize in 1985 for developing the model, which built on early work by Yale economist Irving Fisher in the 1920's.
The model assumes that an insured's goals are to secure the living standards of the household and ensure comparable living standards to his or her survivors. In the economic approach, spending targets are derived by calculating how much the household can afford to consume in the present and still be able to preserve the same living standard in the future. Although spending targets under the Capital Needs Analysis approach can be adjusted to approximate those derived under the economic approach, there are practical limits to doing so. This is particularly the case for households experiencing changing demographics or facing borrowing constraints. Currently there is no up-to-date software that incorporates this method.
A benefit of this approach is that it incorporates the concept that as other assets grow, the need for life insurance to replace income will diminish.
The downside of this approach is that it is very complex and depends on a number of assumptions, and the more assumptions that are relied upon, the greater the chance that the calculations will be off.
Go to "A Different Approach" article from AM Best Review that discusses this method more in depth.