Life insurance is a great solution when it comes to securing a financial safety net for your loved ones. Deciding on how much life insurance you need can be a bit tricky. Before you decide on how much life insurance you need, it is best to first determine if you need life insurance, the kind of life insurance that is best for you, and then, meticulously calculate how much you need. There are certain factors and circumstances to consider when deciding on the question of how much life insurance is needed.
Consider the Rules of Thumb
Factors to consider when deciding how much life insurance is best for you, includes sources of income to the specific needs of dependents.
- Your age: How much income do you need based on your age? Premium rates for a young person in good health (20s, 30s) are better than those offered to someone older (over 40) and less healthy because the younger individual poses less risk to an insurer.
- Age of spouse and children: Estimate how many years of income replacement your children will need in the event of your death.
- Mortgage and debts: Consider your mortgage, car and student loans and all other debts when making your calculations.
- Education expenses: Future college expenses for your children should be factored into your insurance planning, including tuition and housing.
- Your current income: Assess whether you need to replace your full income or only a percentage.
- Funeral expenses: Make plans for burial coverage and related expenses so that your loved ones will not be left with that burden.
Human Life Value Approach
A human life value calculator can help you determine the amount of protection you need, by taking into account age, gender, occupation, current and future earnings, and employee benefits.
The calculation involves:
- Estimating your earnings, over the course of your lifetime, typically from now until retirement, taking into consideration future wage increases.
- Subtract your yearly taxes and living expenses from the total salary.
- Determine an estimate of expected earned interest on the remaining total and subtract it from the gross amount.
- Add the cost of additional employment benefits that will need to be replaced upon your death.
In simple terms, human life value presents the value of all future income that you could expect to earn that could benefit your family.
This method involves multiplying the client’s current annual income by the number of years you want to provide financial support for your dependents. Industry recommendation is to have seven to ten times your annual income in death benefit or payout amount. If you are making $70,000 a year, somewhere between $490,000 and $700,000 would be the estimated life insurance amount needed to sustain your dependents. The figure is not set in stone, only a starting point of consideration.
You don’t want to overestimate or underestimate how much life insurance you need. If you conduct a careful assessment of your needs, the best type of life insurance policy for you, sources of income and the position that you want your dependents to be left in after you have passed, you can determine how much life insurance you need. It is tricky to determine, but quite possible to achieve.
About Aegon Life
With a complete product suite of life insurance plans, superior technology, and customized service, Aegon Life Insurance Company Limited launched its pan-India operations in July 2008. As a joint venture between Aegon – world’s leading financial services and Bennett, Coleman & Company – India’s leading media house, Aegon Life Insurance adopts a local approach to facilitate customer interaction. Our vision to be the most recommended new age life insurance company has enabled us to leverage digital platforms that bring transparent solutions to customer needs. Our financial planning and investment solutions include term life insurance plans, pension plans, unit-linked insurance plans (ULIPs), health insurance plans, child education plans, and more.