Calculating How Much Life Insurance You Need

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Calculating How Much Life Insurance You Need

Your typical insurance agent will urge you to cover eight to 10 times your annual income. A more accurate way of determining exactly how much life insurance you need is to run the numbers yourself.

Step 1: Determine what your family needs if you die suddenly

Number one is your daily expenses. For that you need your household budget. How much do you spend regularly every month? If your spouse isn’t working, then enter the entire household budget. Otherwise, deduct the expenses that your spouse can cover. Multiply by 12 to get the annual figure (and add other annual expenses). Assume a reasonable investment return and using the future value formula of Microsoft Excel, you will come up with a replacement fund, which when invested will produce the income needed to pay for your family’s daily requirements. That represents the bulk of your protection needs. One more item: your children’s educational fund. Estimate the tuition of each child from grade school to college and forecast the future value.

Step 2: List down all your debt

You don’t want to leave your family with loans, so include the balance of all your debt, including credit cards, personal loans, car loan, and the mortgage.

Step 3: Compute final expenses related to your death

There are expenses your family has to pay for before and when you pass away, such as your hospital bill, funeral expenses, and estate tax, among others. Obviously these aren’t part of your regular budget, so you need to allot for these. Add the total of your replacement fund, education fund, debt, and final expenses to come up with your total protection needs. Staggering isn’t it?

Step 4: Add up your existing insurance policies and other sources of funding

You may have an existing insurance policy. Perhaps you bought variable unit linked insurance and an endowment plan for investment purposes. Your employer may have purchased group insurance for employees. If you have a mortgage, you definitely have term insurance tied to your loan called mortgage redemption insurance (MRI). Maybe you have a pre-need pension plan with free term insurance coverage. Add up all the coverage amounts. If you have assets like cash, deposits, mutual funds, and other placements that can fund the needs of your family, add those. As an option (since your family may opt not to sell), add the market value of your family home and other real estate properties. Sum everything up to get your total protection sources.

Step 5: Get the shortfall

Deduct your total protection sources from your total protection needs and you’ll determine your total protection surplus – or more likely, shortfall. That’s how much additional insurance

Protection Needs
Replacement Income
Monthly Need
Annual Need
Investment Yield
Educational Fund
Child 1
Child 2
Child 3
Debt
Credit Cards
Car Loan
Mortgage
Other Loans
Final Expenses
Hospitalization
Burial/Funeral
Estate Settlement
Miscellaneous
Total Protection Needs
Protection Sources
Cash and Placements

Deposits
Investment Funds

Life Insurance

Term Insurance

Whole Life Insurance

Variable Life Insurance

Group Life Insurance

Mortgage Redemption Insurance
Other Insurance

Real Estate

Family Home
Vacation Home

Rental Properties

Total Protection Sources
Total Protection Surplus/(Shortfall)

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