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.

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