Life insurance is very important, both for you and your loved ones. It is designed to provide protection just in case you lose your income generating capacity either through accident, health issues or death. However, life insurance is a very misunderstood concept as the majority of the people think that life insurance is just an additional expense that doesn’t really do much good at all. What they don’t understand is that it is not necessarily something they can’t purchase once they need it.
If you know what life insurance is and understand what it is for, then well and good. However, you might run into the dilemma of thinking “how much life insurance coverage do I really need?”. If you pay too little for less coverage, you’re not 100 percent protected and if you pay too much, you’ll end up paying more than you really need. Below are some tips for you to know how much life insurance coverage do you really need:
1.) Assess your current income annually and multiply it by three. For example, if you’re earning $1,000 a month, you’re earning P12,000 in a year and $36,000 in three years. Hence, you need to get a life insurance coverage of around $40,000 ideally to compensate your income for the next three years in case you lose it. However, in order to give some allowance, it is advisable to set a 50 percent buffer on it hence instead of getting a life insurance coverage of $40,000, add 50 percent to it and make it $60,000 coverage. The purpose of such is to give you or your loved ones some extra mile in your finances.
2.) Approximate how much do you need in the future. Life insurance provides protection at any stage of your life. What most people miss out in getting life insurance plans is the thought of retiring in the future. Retirement means you will no longer work for money, hence you’ve got no other choice but to let money work for you or maybe if you’re fortunate enough, have children who will support you financially. Retirement is a very critical stage and what you plan and do now will determine what kind of retirement will you have. Assuming that you want to get a monthly income of $3,000 a month after 20 years at 10 percent annually coming from your investments, you need to accumulate at least $360,000 within 20 years. Ten percent of $360,000 is $36,000 which could provide you $3,000 a month every year.
3.) Always consider that your assets are growing. Aside from income protection, life insurance is also an excellent way to protect your assets and let your heirs or loved ones gain access to it just in case of your untimely death. Just to give you an idea of how much would it cost your heirs to claim your assets, they are required to pay roughly 20 percent of your assets’ worth. Hence, if your assets are worth $1M, then they are obliged to pay around $200,000 to get all of it. In order to get rid of this problem, you should get a life insurance policy that is worth more or less 20 percent of your total assets so that they will use the proceeds in order to claim your assets. One great thing about it is that they will get it tax free.
Such ways of determining the life insurance coverage that you need are just the basics, but it will spare your either a lot of money since it will keep you from paying too much for premiums, or from headaches in case the coverage that you get is very low compared to what you really need. Getting the right amount of insurance protection will make you much more efficient at planning and working out your finances.