A life insurance policy helps pay off a person’s present debts, and helps his family survive and maintain a normal standard of living, in case of his death. Now, if you are an individual with no dependents, you might be able to do away with such policies, but if there are others who depend on your income, then getting an insurance is a good idea to replace your earning potential, when you are gone.
How Much Life Insurance Does a Person Need?
A lot of calculations and factors are to be considered while determining the answer to this question. Listed below are a few factors to be considered while calculating the amount for which you need to be insured.
Factors to be Considered
- Your present financial standing.
- Whether or not your spouse is working.
- Any major expenditure in the near future like buying a new car, an apartment, children’s education fees, and so on.
- Debt to be paid off (if any).
- Present size of savings of the family.
- Social benefits, pension benefits, etc., available after death.
How Much Life Insurance is Enough?
- Consider your financial situation and ponder upon the factors mentioned above.
- Once you’re sure of the short and long term financial needs of your family, you should arrive at a certain figure, let’s call it A.
- To this figure you ought to add the inflation cost which rises at a pace of around 2% every year. We get B.
- Now, count all your liquid assets like stocks, bonds, savings, and any other assets that you might have, which can be liquidated. We will call it C.
- Then reduce all the liquid assets from the figure you have calculated. i.e. (B – C).
- The figure you arrive at is exactly what you are worth, and has to be replaced.
To make things simpler, I have a simple formula you could use:
Long-term needs + short-term needs + inflation cost – resources (that can be liquidated) = how much life insurance you should have.
It is easy to get a large cover of life insurance, but you end paying a lot of extra money for it. So, it’s important you get just enough insurance cover so as to assure the replacement of your present income. You can also consider getting advice from a financial planner, who can help you arrive at the exact amount of life insurance required.
Life insurance comes in different sizes and boasts about different features, prices, and terms. If you need a life insurance, make sure you educate yourself to make the right choice, because you don’t want to end up paying more or be stuck with inadequate coverage. So choose a policy that is more likely to fulfill all your financial needs, and please read the offer document carefully before investing!