How Much of Life Insurance You Need?

There is no need to emphasize the importance of having life insurance. Life expectancy is increasing and the world is becoming, by and large, a safer place. At the same time the risks to life are also increasing and the final eventuality of death will always remain. So the question is not one of do you need life insurance, it is how much do you need?

The Cost Of Insurance

Everyone would like to leave a huge estate behind them so that their heirs can live in luxury. But insurance comes at a cost - the higher the value of the policy, the higher the premium that you need to pay. Unless you are among the lucky few for whom money is of no consequence, you will need to balance out the value of the policy and the cost you will be paying for it. There is no point in having a $20 million life insurance policy if the premiums are going to keep you living like a pauper. The quality of life that you and your family live today is as important as the quality of life your insurance will enable them to live after your time.

The best way to go about deciding how much life insurance you need is to begin by deciding the total annual income that those you leave behind (typically your spouse) need to live as you would want them to - in comfort and security.

Security For The Spouse
Let us take the hypothetical case of a spouse that needs $100,000 a year to continue to live in comfort. Your estate will have to provide him or her with this amount of income as well as keep a small provision for increases in the cost of living. Let us say that your estate, in total, generates an annual income of 4% of the capital amount. And suppose your total savings and assets (not including your home which the spouse will continue to occupy and which will therefore not produce any rental income) equals $1 million. The annual income your spouse will receive from this will be, using the 4% rule, $40,000. That leaves a shortfall of $60,000 to be covered by life insurance. Sticking with the same 4% rule, you will need a policy of $1.5 million to produce an additional annual income of $60,000. So should this person go and buy $1.5 million worth of life insurance? Maybe not.

Income Beyond Insurance

If the spouse is working and earning a regular income, it can be safely presumed that this will continue after the policy holder's demise. It is also likely that the spouse will have a retirement plan to look after him or her after their retirement. If the spouse has an annual income of $30,000 then the amount of income to be produced by the life insurance can be reduced by this amount or a sum close to it because the spouse will have the $100,000 annual income he or she needs.

Another issue to be considered is how long the income will be required. If current financial constraints prohibit taking a large $1.5 million policy, husband and wife should discuss plans for when one of them is no more. Will the survivor, after a period of adjustment be able to start earning? Are there inheritances that are certain to come to the survivor in the future? If the answer to these and similar questions is in the positive, then a life insurance policy that will cover expenses for a determined period of time is adequate. The survivor knows and is prepared for this and in the meantime, the cost of insurance is kept under control.

Source:

http://www.forbes.com/sites/lawrencelight/2012/11/18/so-how-much-life-insurance-do-you-really-need/

No one knows when the unexpected can occur. While unexpected loss isn't part of anyone's personal plans, it should always be considered in our financial plans. The death benefit protection offered by a life insurance policy can be a key component of a sound financial plan. Allied Brokers is a full-service insurance brokerage. Founded in 1954, we provide insurance products throughout California and several other states.Experience the "can do" attitude of our agents. Let us make your Insurance search easy.http://www.alliedbrokers.com/life_insurance.html

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