How Much Life Insurance Do You Really Need?

You work hard to build a nest egg that will reap benefits in the future. One of the prime ingredients in the recipe for the ideal financial portfolio is always life insurance – as most online investment sites will inform you. However, given the multiple and varied choices in policies available, how do you know how much coverage is right for you?

What Does It Take to Determine the Life Insurance Coverage You Need?

Investment agents and advisors are forever advising that a certain percentage of your salary needs to be invested in various financial instruments. For life insurance, agents use a standard norm while suggesting coverage – invest in a plan that is 5 to 10 times your salary. While that may sound extreme, sit back and learn the why of it before you brush it aside!

Here’s a step-by-step process that will help you understand why insurance agents and financial advisors suggest you invest what seems like such a large sum of money into life insurance:

• The first step is to calculate all your household expenses for a year, every bit from large expenditures to the smallest bill, taking into account different seasons and the utilities required. Also, input “disaster/crisis expenditure”, and any other needs you need to take into account, like care and support for a loved one with special needs.

• Multiply that total amount by the number of years for which you think you will need coverage. Better still, calculate as per your projected retirement and how much you can earn in the next 15-20 years or more, as you will need that amount when you stop working or when you pass way and your family needs to meet expenses.

• If you or your spouse receive employer-provided coverage, you may need to supplement it with an individual plan. Factor in pregnancy expenses, post-natal expenses, children’s education and their future needs, just in case. After all, you are insuring yourself for your family’s needs and benefits.

If you’re single, remember that you will still need a life insurance plan to assist you when times get hard and you need some money to fall back on.

• Once you have that all worked out, the next step is to take inflation into account. What does inflation have to do with life insurance? Well, plenty. When you’re young and strong, you can earn enough to meet your expenses, but that gets tougher to do when you retire.

As you move up the ladder, you may earn more, but your needs and wants also increase, along with the prices of things you’re paying for. So, when calculating expenses and the insurance coverage you need, factor in at least 5-10% inflation costs. You will then realize why you should invest 5 to 10 times your present salary for life insurance.

How Can I Ensure I’m Not Paying Too Much?

Buy life insurance when you are young, as premiums are much lower. When you get older, medical requirements start getting calculated and premiums shoot up. It’s also a good idea to consult a reliable insurance agent or advisor, so you can better understand the kind of policy, amount of coverage and the disbursement terms that are best suited for your needs.

There are many tools available online for calculating and taking into account all your expenses, and then presenting a realistic coverage amount. Input as much as possible – a car, apartment, a holiday once a year if necessary, so that when the time does come, there are no surprises when paying that monthly, quarterly or annual premium.