How much Life Insurance does one need?



Mortality is one of the main characteristics or key events of human existence. Death happens to everyone and it is always uncertain; but a carefully executed life insurance policy can help prepare for life's uncertainties such as creating provisions for your family and loved ones following your death. Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of the policy holder. A life insurance policy can ensure financial security for your loved ones and provide you with peace of mind knowing that the future of those who depend on you such as your spouse, children and dependent parents, is secure.

But how much Life Insurance does one require is a decision which must be carefully deliberated upon before taking up a policy. Even though it is impossible to get exact figures, experts recommend a life insurance policy should be approximately 5 to10 times the annual income of the insured. This is only a rough estimate and the answer really depends on how much money you think your dependants will need after your demise. Having said that, we've tried to simplify the process of figuring out the right Insurance Cover (Sum Assured) for you. Consider the following three steps:

Income replacement or future financial obligations:

The most important question is how much income so the people dependent on you need if you aren’t around. Outline your family's cash-flow needs as well as financial goals. Determine if you have enough coverage to pay for future financial obligations such as college for your kids or your daughter’s wedding. Consider the priorities and take into account your standard of living, income and spending habits before you arrive at the benefit you wish your dependent ones to receive at the time of your demise. Add it all up to figure out the estimated amount of money that your survivors would need. That's Step 1!

Evaluate your family’s needs and tally up the resources:

It is extremely important to figure the budget in running your household and consider the money that would be available including your spouse's income and other sources of income besides your job. A life insurance policy should pay for immediate expenses and offer critical illness and disability rider to help in case of personal hospitalization and medical expenses, as well as funeral bills and taxes. The difference between your family's financial needs and the available resources will tell you how much life insurance you will need.

Personal Debts:

One also needs to consider debts or loans that you have. You wouldn't want to burden your kin with your liabilities. All of your debts must be paid off in full which might include car loans, mortgages, credit cards and loans amongst others. Use a personal budget software package or your bank statements to estimate your spending. And if you are saving money regularly and living within your means, you probably don’t need to replace all of your income and need less term life insurance.

Now to the difficult part - lets say you have a figure 'x' in front of you after adding up the results in the three steps above. This 'x' amount of money is what you/your family would need 'y' years in the future.  The value of this 'y' could be  10, 20 or 30 years depending on your age and life stage. If you know your math well, you would have figured out that we are trying to explain the present value concept. For the rest, imagine if you had the 'x' value of money that you calculated earlier, available with you right now and you could put it in a bank. By the end of 'y' years that money would've grown on account of interest. The total that you get after doing the math, is the amount of insurance you need. That's one of the many ways of calculating the value of Life Insurance you need. We urge you to spend time and do this calculation, or if you you want to take a short cut just use the Life Insurance Calculator on our Home Page.

Oh and of course, no one has the that 'x' amount of money to put in a bank right away. Although we wish! And that is precisely why each one of us needs Life Insurance.

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