How to Determine How Much Life Insurance Coverage Do I Need?

Determine the Purpose of Buying An Insurance

 

Before determining what is the amount of insurance coverage you need, you have to ask yourself a question first: Why do I need an insurance? The answer to it shall always be closely related to the dependents that you love and care. For instance, to take care of your aging parents or perhaps to make sure your children grow up till self-dependence when you are not around.

 

How Much Insurance Coverage Do You Need?

 

There are many approaches to calculate the insurance needs, but for sure, you will not get a firm answer for that. Even if you have come out with your own answer now, you may need to top it up sooner or later when your responsibilities increase.

 

However, there are always guidelines where you can use as inputs to your needs calculation. Below are some of the areas you may concern:

 

When we calculate insurance needs, the fundamentals are always based on the living expenses. It is about how long can your insurance covers the living expenses of your dependents.

 

On Expenses:

  • Determine your parents' annual living expenses and years needed (years needed shall means the life expectancy minus their current age)

  • Determine your spouse's annual living expenses and years needed (years needed can be: life expectancy - current age; or years until the eldest child attain self-dependence age)

  • Determine your children's annual living expenses and years needed (years needed shall means years until the youngest child attains self-dependence age)

  • Determine the child care costs and years needed. This is needed if you are a single parent.

  • Determine children's annual education costs and years needed (years needed shall means years until the youngest child graduated from tertiary education)

  • Determine funeral and estate settlement expenses

  • Determine your current debts

After calculating all the expenses, now you need to calculate the assets and insurance you own.

 

On Assets:

  • Determine your spouse's income

  • Determine your Social Security benefits and years it lasts

  • Determine the total of your other assets

On Life Insurance:

  • Determine your current insurance coverage

  • Determine the insurance coverage provided by your employer

  • Determine your mortgage insurance

TOTAL INSURANCE NEEDS = (TOTAL EXPENSES - TOTAL ASSETS) - TOTAL LIFE INSURANCE

 

If the outcome is a positive, you need to top up your insurance as much as the amount. If it is a zero, your insurance coverage is enough. If it is a negative, you may be over insured. In case of over insured, do not in hurry to surrender your policies as insurance needs are dynamic. If some of your insurance policies are of Universal Life Insurance, you can simply make adjustments without having to give up your policies.

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