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Five Ways To Determine How Much Life Insurance You Need
Author David Schneider | May 23,2007
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One of the aspects of buying life insurance that people find perplexing is the issue of quantity. In other words, how much life insurance to you really need? It's not surprising that so many individuals find themselves stymied by this issue. After all, life insurance can be a substantial expense, and most of us are likely to agonize over much smaller financial decisions. For instance, how many times have you been in your local package store stocking up for the weekly barbecue, only to become frozen with indecision about whether to buy a few cases of beer or just step up to a full keg? It can be a nasty dilemma, so just imagine how much more confusing it is to determine the proper amount of life insurance in which to invest.
Fortunately, you can calculate how much life insurance will meet your unique needs without going overboard by a few handy means. While no simple formula will ever give definitive enough information to make a decision alone, taken together these methods, along with an extensive discussion with the people most directly impacted by the policy you buy, you should have enough information to reach an educated decision. So let's take these methods one at a time.
You've probably heard that the simplest way to determine how much life insurance you need is to multiply your annual net income by a certain amount. The multiples most often applied to this formula range from five to ten times the total figure, but some financial advisors will recommend going as high as twenty times your income depending on a host of mitigating factors. Ultimately, it can be a useful exercise to map out figures based on these multiples, but you should bear in mind that you can never reach a truly accurate picture this way.
How come? Since the formula does not take into account all your “hidden income.” Calculating these items is a second way to figure out how much life insurance you need. Hidden income reflects all the ways you benefit your dependents financially that do not come directly from your wages. For instance, if the company you work for includes full health insurance, that's hidden income. Also, any professional services that you perform for your family, that others will have to do after you death, count as hidden income.
One you factor in those items, you will have a much different sense of how much insurance you need. Next, you want to look at your dependents and determine what kind of lifestyle you want them to have after your death. Budget accordingly to get a firm monetary figure, and apply that to a policy plan. After that, a fourth way to determine the amount of life insurance you will need to buy is to assess how much debt and other expenses you are currently carrying that will fall to your survivors. The last thing you want to do is burden a grieving family with credit card debt, mortgages, tax liabilities and other expenses simply because you failed to figure those items into your overall life insurance calculation.
Finally, don't forget to look at all funeral expenses that your family will need, depending on your wishes for final disposition. These can get expensive, and you should thus reflect them in determining how much life insurance you need. |
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