Determining How Much Life Insurance You Need

by Stephen Nelson

When considering life insurance, you’re planning and preparing for an event most of us would rather not think about. But life insurance represents a critical step in managing your personal finances and ensuring your family’s well-being. The Two Approaches to Setting Life Insurance Policy Amounts You can use one of two approaches to estimate how much life insurance you should buy: the needs approach or the replacement-income approach. Using the needs approach, you calculate the amount of life insurance necessary to cover your family’s financial needs if you die. Using the replacement-income approach, you calculate the amount of life insurance you need to equal the income your family will lose. Let’s look briefly at each approach. You need how much? Using the needs approach, you add up the amounts that represent all the needs your family will have after your death, including funeral and burial costs, uninsured medical expenses, and estate taxes. However, your family depends on you to pay for other needs, such as your child’s college tuition, business or personal debts, and food and housing expenses over time. The needs approach is somewhat limiting. The task of identifying and tallying family needs is difficult, and separating the true needs of your family from what you want for them is often impossible. Replacing Income Using the replacement-income approach for estimating life insurance requirements, you calculate the life insurance proceeds that would replace your earnings over a specified number of years after your death. Life insurance companies sometimes approximate your replacement income at four or five times your annual income. A more precise estimation considers the actual amount your family members need annually, the number of years for which they will need this amount, and the interest rate your family will earn on the life insurance proceeds, as well as inflation over the years during which your family draws on the life insurance proceeds. Note: Do remember as you quantify the income you want to replace that Social Security provides generous survivors benefits if you’ve qualified. These benefits can easily total $2,000 a month or more. Calculating Replacement-Income Amounts with Excel If you’ve got access to a computer running Microsoft Excel, the popular spreadsheet program, you can use your computer to calculate the amount of insurance you need to replace a specified number of years of income. Suppose, for example, that you want to buy enough life insurance to replace the income from a $50,000-a-year job for 15 years. If you figure your family will earn 5% on the life insurance proceeds should the worst case scenario occur, you enter the following formula into a cell in an Excel workbook to calculate the replacement income life insurance amount: =-PV(5%,15,50000) Excel returns the formula result 518,982.90 indicating that you would need roughly $520,000 of life insurance, invested at 5%, to payout $50,000 a year for 15 years. Two Calculation Tips If you want to factor in inflation because you’re trying to replace income over a long period of time, you should use a real rate of return rather a regular, or nominal, rate of return. To calculate a real rate of return, subtract the inflation rate from the interest rate in the formula. For example, if you expect 2% inflation, you could replace the formula shown earlier with this formula: =-PV(5%-2%,15,50000) Here’s a final calculation tip: You probably want to round up your number. For example, if the formula provided earlier returns the value 518982.90, you might want to round up this value to $600,000. Or $750,000. About the Author: Stephen L. Nelson CPA has written more than 150 books. His bestselling book is Quicken for Dummies, which sold more than 1,000,000 copies. His books have sold more than 4,000,000 copies in English and have been translated into more than a dozen other languages. His web site is http://www.stephenlnelson.com Source: www.isnare.com

Discount Life Insurance

by Matthew Bourne

Life insurance is a type of insurance policy that provides financial security and peace of mind for you, your family and dependants. It is based on the simple principle that should you die during the term of the life insurance policy, the person(s) named in the insurance policy will receive a lump sum or series of payments for the insured amount. If you have a mortgage and/or are the main income producer in the family, a life insurance policy will ensure your family's future is secure as the payment can be configured to pay off all outstanding debts and provide a substantial income for the ones that you leave behind. Buying life insurance When buying life insurance it is advisable to shop around for the best discount. Life insurance premiums can vary significantly between life insurance providers, while some providers will even offer discount life insurance, guaranteeing their premiums to be the lowest available on a like-for-like basis. If you want the best discount on your life insurance policy you'll need to look out for special discount offers run by the insurance providers. This may take some time however, and you're not guaranteed that the next discount offer that becomes available will be the right type of life insurance policy for your circumstances. Alternatively, you should instead conduct your search for discount life insurance online. Online = discount life insurance Why is it important to look online for discount life insurance you may ask? Well, the reasons are numerous! It's quick, it's easy and there is a huge amount of choice available on life insurance policies at the click of your mouse. Best of all though, life insurance policies found online are generally cheaper than those found offline. This is because there are fewer overheads involved in processing an online application form for life insurance than there is when a life insurance company processes a paper-based application. The costs incurred by the life insurance company when they advertise on the Internet are also lower than say if they were to advertise on the TV, radio or via newspapers. Additionally, portals and web sites that provide a comparison between different life insurance policies, some of which will be discount polices, are certainly worth a visit, especially if they provide access to online application forms. Why are they worth a visit? Well, not only will these portals offer you a selection of the lowest priced discount policies available, but you may also be able to pick up a further discount when buying the life insurance policy through the portal. About the Author Matthew Bourne has been working in the loans, mortgage and life insurance industry for over 10yrs and is currently working for http://www.loansgalaxy.com/life-insurance/