How Much Life Insurance Do I Need?
October 27th, 2007 | 
Author: Life Insurance Needs differs from one person to another but, in general, an individual’s needs are greatest from the time he started his career or a family until the time he reaches retirement age, where his needs for life insurance gradually diminishes. The following are some of the factors that should be considered when estimating how much life insurance you need and how much protection that you should have.
* Final Expenses - These includes funeral and burial expenses, cost of probate, legal and accounting fees, and federal estate and state inheritance taxes.
* Unpaid Debts - Last illness expense, personal bills, credit card debt, loans and mortgages and other outstanding liabilities.
* Adjustment Fund - This fund allows for adequate bereavement due to loss of a loved one. It may be used to cushion the immediate lifestyle adjustment that a family may face. The family may be forced to move, or the surviving spouse might have to look for a new job. In addition, a working spouse may find it difficult to return to work immediately after the death of a partner. The spending habits of the survivors usually change and should be considered when determining the financial loss.
* Income Replacement - A consistent income stream should be considered to help pay for the family’s living expenses, such as mortgage payments, monthly bills and daycare.
* Education Fund - When the breadwinner’s source of income is cut off, the children’s education may be affected if the education fund is not sufficiently provided.
* Dependent Income - This provision of fund may be considered for their dependents and aging parents.
It is always a good practice to run a Life Insurance Needs Analysis based on either the Rule of Thumb or Income Protection Model. The Rule of Thumb indicated that a sum assured of 5-10 times of a person’s annual income be used. If the person’s income is small and saving rate is low, then the higher end at close to or at 10 times will be considered. If the person’s income is large and saving rate is high, then the lower end of the scale at 5 or 6 times will be used. In the event of a stay-at-home spouse, estimate the economic replacement costs for services rendered and input as annual income. The Life Insurance Needs Analysis will give you an in-depth overview of your family’s potential need for capital and how much you need for your life insurance.
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