THURSDAY, JUNE 19, 2014
Life insurance is arguably one of the most important investments you can make. While it may be an undesirable thought, you may wonder how your family’s lifestyle will be affected if one day you, the breadwinner, passes on. In the quest to secure the lives of your loved ones in your absence, it is logical to wonder just how much life insurance is enough.
Answering this question appropriately ensures that you neither under-insure nor over-insure your life. It is difficult to estimate the appropriate value of life insurance you should have. This is because there are a variety of factors that come into play when determining the amount of coverage.
Factors include: age, career stage, marital status, earning potential of spouses, number of dependents, financial obligations and possible expenses subsequent to your demise. Nonetheless, here are two methods with easy steps that you can follow to figure out how much life coverage you need.
The Family Needs Methodology
This four-step method puts into consideration your family needs and available assets. It gives you a realistic figure of how much life insurance you need.
1. Estimation of Immediate Needs
Estimate the financial needs that your family would have, following your death. These include settling your final medical bill, paying their bills, settling debts, emergency funds, your children’s education and funeral and burial expenses. Obtain the approximate total of these expenses.
2. Estimation of Ongoing Income Needs
Ongoing income needs include provision of basic family needs, including medical care and transport. You should also include the surviving spouse’s financial needs until and beyond his/her retirement.
3. Determination of the Assets Available
This entails calculation of the available assets that the family possesses which may be used to offset the financial obligations your dependents will have to take care of following your demise.
4. Estimating the Value of Your Life Insurance
Once you have estimated the gross income needs and the available assets which can be used to finance the financial obligations, the next step is to calculate the difference between the two values. This is the value of the insurance coverage you should obtain. This ensures that when you die, your family will be able to comfortably take care of all their financial obligations without any problems. It is imperative for you to keep updating your insurance coverage with time. This is because your life insurance needs will change with your changing circumstances. For example, as your children get older, their financial needs will change. Reviewing your insurance plan ensures that it remains realistic and avoids over-insurance or under-insurance.
The Income Replacement Method
This technique is based on the idea that your present income is adequate to cover all of your financial needs. It involves replacing your income so that when you die, your dependents will continue accruing an amount equaling your income at similar intervals. If you are able to cover your obligations using your current earnings, you can use this formula to determine the value of life coverage you need to obtain.
Using this method, the amount of insurance coverage is estimated by multiplying your current salary by 10. The figure obtained is the value of your insurance coverage which you should obtain to ensure that your dependents are able to foot their bills after you are gone.
When you pass, your dependents would invest the life insurance in appropriate mutual funds so they'll earn interest equal to your annual income. Therefore, they'll be able to settle their financial problems without much hassle.
We can help you determine the right amount of life insurance as well. Use our life insurance calculators on our website, give us a call at (937) 592-4871 or visit our life insurance site and request your quote.
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