Tuesday, July 23, 2019

How much Life Insurance do you need?

Awareness of the necessity of life insurance is one thing. Having a clear idea of how much of it you need is another. Different people have different opinions on this subject. One may have the minimum that will cover just the funeral costs; another may plan giving the dependents at least a small cushion to help them recover from your bereavement and pick up the threads.

The reality is that there is no single right answer to the question of how much life insurance you should have. The best way to find an appropriate answer is to contact a life insurance professional, who will be able to analyze liabilities, the short- and long-term needs of your dependents and other relevant factors.

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However, if you want to do some research on your own, so that you have issues to discuss with the expert, you could use these two formulas:

L.I.F.E.

L.I.F.E. stands for Liabilities/debts, Income to be replaced, Final expenses and Education and/or other expected costs. You can calculate your life insurance needs based on these factors.

A. Total up everything covered by the L.I.F.E. needs. Ensure you leave nothing out. That is the total coverage you need.


B. Subtract all the assets and savings that will be available to your family on your passing. It is tempting to inflate the amount by taking into account expectations from your stock market investments etc. Do not commit this mistake; they are volatile investments.

C. Also, subtract any life insurance you currently have and any coverage provided by your employer etc.


The gap between A and B+C = the amount of additional life insurance you need.

D.I.M.E.F.

This stands for Debts, Income, Mortgages, Education and Final expenses.

  • Debts: These would be every liability you have and everything you owe, including credit card debts, car payments and so on.
  • Income: What is the income that will be lost to the family? This is your current income and what you expect it to be when you stop working; this expectation is normally part of a family’s financial planning.
  • Mortgages: How much is required to pay off your mortgages? Do not think that the amount will be less the following year. No one knows when a claim may have to be filed. If the amount to be repaid is lower in the future, that is an extra cushion for the family and will help cover the unexpected.
  • Education: What do your dependent children want to do with their lives? How much will it cost to educate/train them for the careers they want to pursue? Include any reasonable financial cushion you would like to give them when they start out.
  • Final Expenses: The cost of death is far greater than most people imagine it is. You may desire a small budget funeral. Nevertheless, your family might have an elaborate one in order to ease their pain. Life insurance is to care for those you leave behind and this is a part of that caring. Budget for the final expenses might not be what you desire, but what your family will.
These tests will give you an idea of the coverage you need. To be sure about the protection you require, it would be better to consult an insurance agent.

Evaluating Insurance Policies

Insurance is a competitive industry and insurance companies market their products by making them appear to be as much attractive and user-friendly as possible. That makes choosing the right product difficult. People spend a lot of time comparing breakfast cereals to find the one that best suits them. It is surprising that they do not take the same trouble over their insurance.

It’s not that insurance companies are out to rip you off or mislead you – they are just promoting the sale of their policies. If the policy was not properly evaluated, and if you made the wrong coverage choices, you would live with a false sense of security. However, that would be shattered when a claim is filed, and you find that the coverage is not what you thought it to be.

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Policy comparison

In order to compare and evaluate the benefits of different policies for the same type of coverage, you need to be cautious about the following six key factors, known as the 6 C’s:

1. Cost: Though important, cost should not be the deciding factor. No one wants to pay for insurance more than what is needed. However, if a few extra dollars can fetch you many times the amount of coverage, it might be wrong to brush aside the option.

2.Convenience: Insurance companies make it as easy as possible for people to buy their policies. However, there are industry and legal mandates that need to be followed. At times, these could make one policy easier to obtain than another could. What you need to ensure is that the policy that is easy to get gives you the coverage you need.

3. Coverage: Is the protection available under the policy complete? Do the basic policy terms and available riders meet all your requirements?

4. Customer service: Is there a helpline, chat option on the website or other ways to contact easily the company? If you have to file a claim and need some guidance on how to do it, you should not be made to run from pillar to post. The insurance company should help you all along the way.

5. Claim Settlement: What is the company’s record and reputation for settling claims? When a claim is filed, the payment should in no way be delayed. A company with a record of prompt settlement of claims and payments is the right option.

6. Credentials: You need to be certain of the credentials of the insurance company in general, and settlement of claims in particular. You opted for the policy hoping that the insurance company would protect you when the eventuality against which you are insured occurs. If the company fails, you are going to be left without the resources to recover.

Do it the right way

Doing your own research on the insurance you need is a good idea – the more you know, the better for you and your family. However, with a subject as complex and specialized as insurance is, it is easy for a layman to make a mistake like overlooking a key factor or misunderstanding the extent of coverage.

An insurance agent has the experience and expertise in all aspects of a policy. If the agent is with an insurance broker that deals with multiple insurance companies, he will be able to give you a clear, unbiased and accurate picture of all the favorable and unfavorable aspects of each policy. That will lead you to opt for the right coverage at the right cost.