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In my earlier post, I have told you some tips on how much insurance to buy (click here). Now I want to break it down into more details, so you can understand more and calculate your life insurance needs.
Let's start.
Scenario:
A male age 35, married, have 2 young kids.
He earn $100,000 a year.
Have a home loan of $1,000,000.
Have a car loan of $100,000.
We assume that this guy does not have any other loan or debt.
So how much life insurance does he need?
1. Calculate all debts that you have.
He have a total debt of $1,100,000.
2. Income replacement.
He will need to have a pay out that is huge enough to replace his income and plus a little bit extra to cover for inflation. Now we assume that the lump sum pay out can be invested at a return of 8% a year. So, to replace his income, he will need a $1,250,000 coverage ($100,000 x 100/8). Then by adding his salary in a year ($100,000) back to the policy, it will be quite a good buffer against inflation. Total coverage that he need is $1,350,000. This amount will have to be added up to your total debt.
3. Future obligations.
He has 2 young kids that he want to send to university in the future. The cost of education for a local university is estimated at $100,000 each. So he needs to set aside $200,000.
So for this guy, his life insurance needs is estimated at $1,100,000 + $1,350,000 + $200,000 = $2,650,000.
Now that he knows that this is the amount he needs, he should set aside 10% of his income to plan for his protection. From his budget, we can advise him on the different type of insurance that will reach his protection needs. We will not want him to have inadequate coverage or expensive coverage that he does not need.
This is important for you to know, so you know how much you need. Please plan accordingly so you buy the right insurance with the right amount.
Cheers! Have a good day.
Sources: www.investopedia.com/articles/pf/06/insureneeds.asp#axzz1aiykOJ6G
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