Investing in life insurance is an important financial decision. Every individual, when searching for life insurance, must have, at least once, thought “How much life insurance do I need?” Do not worry, most of us go through the same dilemma.
There is no single formula for calculating the insurance amount, nor is a specific amount deemed ideal for all. Factors like your financial obligations, future plans and the kind of lifestyle you follow matter. To help you understand how much life insurance you need, we have created this blog post.
Step 1
Observe Why You Need Life Insurance
Before you decide the exact amount of life insurance to pursue, know why you are buying it. The general purpose of life insurance is to:
- Support your dependents as a replacement for your income.
- A source of repaying debts, such as a mortgage or loans.
- Covering funeral costs.
- Fund for future expenses like children’s tuition fees.
- A charitable gift or inheritance for family members.
Knowing why you want life insurance will help you structure your coverage.
Step 2
List Your Financial Commitments
Make a list of all your present and future financial obligations. These may include:
- Your debts (mortgage, car loans, credit card bills, or personal loans).
- Your daily expenses (groceries, healthcare, child care, transportation and utilities).
- Future obligations (college tuition, weddings, or elderly care).
- Calculating the average of funeral and burial costs.
Step 3
Consider Income Replacement
In the case where the insurance claimant is the sole earner, they must make sure the insurance amount will help maintain stability for their family. The coverage must be at least 10 to 15 times your annual income.
But, before you decide, you must consider factors like:
- The duration for which your family will need financial support.
- If your spouse has a separate income source.
- Whether you have some savings or have made other investments.
Step 4
Subtract the Existing Assets
You must understand that life insurance is not going to cover all your financial requirements. These may include:
- Savings accounts
- Retirement funds (401(k), RRSP, pensions)
- Current life insurance (like employer-provided coverage)
- Investments or other assets
Do not consider these amounts in your total obligations.
Step 5
Account for Special Situations
Every individual’s life brings them a unique set of challenges and opportunities. Consider circumstances that can affect the amount of insurance you need.
- You have a specially abled dependent who would need lifetime care.
- You are in a business partnership, or you own a business.
- Tax on assets, if you own any.
In any of these situations, you’d require higher or more customized coverage.
Step 6
Choose the Right Type of Life Insurance
At Edward Fayer, we offer four different life insurance coverage options:
- Term Life Insurance
This is ideal if you are seeking temporary protection. It offers higher coverage at low premiums, covering debts or protecting dependents in times of need.
- Whole Life Insurance
A coverage that provides lifelong protection to your family. The cash value increases over time. It is both an effective financial tool and a safety net, allowing you to borrow against the accumulated value.
- Universal Life Insurance
Another lifetime protection which allows you to adjust your premiums and coverage according to your needs. It is like an investment which allows you to build cash value over time.
- Customized Policies
These are flexible insurance options crafted according to your financial and personal goals. If you want, you can combine term and whole life coverage and also make adjustments to your policy as needed.
Step 7
Adjust for Inflation
Most of us fail to account for future expenses, specifically because of inflation. For example, the cost of college tuition or healthcare, ten or twelve years from now, will be remarkably higher.
Considering a hedge of 10 or 20%, to replace the increasing cost, is necessary when calculating the coverage you’d need.
Step 8
Make Regular Reassessments
Life insurance is not a one-time purchase. Timely reassessments are needed, especially when you have crossed a significant milestone in your life. For example:
- Getting married
- Having a child
- Buying a home
- Starting a business
- Divorce
- Change in income
It is recommended that you review your coverage at least every two to three years. This way, you make sure your insurance provides adequate coverage.
A Simple Formula To Find the Estimate
A straightforward formula to get a quick estimate of your life insurance coverage amount is:
(Annual income × number of years needed) + debts + future expenses – existing assets = life insurance need
Use this formula, and set your numbers to determine the estimate. Wasn’t it that simple?
Conclusion
Life insurance is like the umbrella protecting your family against a strong splash of rain. It makes sure that your loved ones are able to stand upright without facing any financial strain. While looking for an ideal life insurance, you may find several “rules of thumb”, but the best way to determine is to seek an answer to “How much life insurance do I really need?”
Unable to decide how much life insurance you need? Edward Fayer takes a personalized and expert-driven approach to help you find your estimate. With immense field experience in financial and insurance services, our team closely collaborates with you to understand your unique circumstances. We will be assessing your current situation and future needs, as well as critical factors that might impact your coverage amount.
What makes us different from other insurance solutions providers is that we offer transparent advice and a strategic plan, making sure you do not pay for unnecessary coverage. With our guidance, you will be able to determine a near-accurate estimate of your life insurance amount.
Need some expert help? Contact us today to simplify the whole process of calculating life insurance amount.
