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Insurance is the means that an individual or a family can use in order to help them prepare against the emergencies of life. Life insurance is the form of this preparation that helps in the worst emergency ? the death of a loved one. This could be for anyone in the family, or for the main breadwinner. Because so many things can happen to people, mostly unexpected, we want to be ready in the event that it does happen – but hope, too, that it never does. This article will show you how to determine just how much life insurance you should have in order to be prepared in the best way possible.

When determining just how much coverage you should have, here are some things that you definitely want to take into consideration.

Your Yearly Expenses

In the event that the main earnings winner should pass away, the goal of a life insurance policy is to sustain the family at its present level of living for a while. This means you need to calculate exactly what it costs for the family to live at the present level for one year. In order to help you calculate according to the rising cost of inflation, you should add a percentage increase for each year – possibly as much as 8%PRCTG%.

Educating The Children

To this figure, you need to add just how much it will cost to put each child all the way through college. Of course, this may be a little hard to do, since college costs are rapidly raising. You should add, however, a percentage increase for each year until they graduate. A suggested amount would be 1 or 2%PRCTG% increase of the current tuition per year before college and during.

Current Debts

All of your current debts should also be added to the total amount of life insurance coverage. By adding this amount, it would enable the family to continue its current level of life – debt free. If there is any mortgage balance still owed, credit card debt, your own education bills, and any other bills should all be added into the calculation.

Funeral Costs

The costs of funerals these days have become a lot more expensive than they used to be, along with everything else. Funerals are now an average of about %6,500. Just to be safe, though, you need to add another %4-%5,000 so no debts are left after the funeral.

Inheritance

In your absence, it would be a good idea to leave your children a little extra to get them started and secure in life, if you are able. Calculate how much you want each of them to
have, and then add that amount to the total.

Finally, in your calculations, you may want to add a couple of other things – depending on your situation. If you have parents that may need nursing home care before long, or a divorce situation that you have to include, or you may even want to add a donation to either a religious organization or to a charity. It all depends largely on what you can afford. You will not want to buy hastily, without having a rather good understanding of life insurance, and make sure that you do a cost comparison, too.

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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 Life Insurance

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%PRCTG% 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%PRCTG%,15,50000)

Excel returns the formula result 518,982.90 indicating that you would need roughly %520,000 of life insurance, invested at 5%PRCTG%, 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%PRCTG% inflation, you could replace the formula shown earlier with this formula:

=-PV(5%PRCTG%-2%PRCTG%,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.

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An insurance broker is a middleman; someone who acts as an intermediary between an insurance company and a person who wants to buy life cover. A discount life insurance broker goes one step further by sacrificing all or most of the commission paid for selling a policy to reduce your premiums.

If you’re on a budget, using an independent discount broker can help you get a good deal on your life cover and allow you to save as much as 40%PRCTG%. Note that the term ‘discount’ doesn’t mean the insurance you buy is of any lesser quality. The insurance policy you buy is exactly the same as the policy you’d buy directly from the company, but you pay less.

Using a discount life insurance broker is typically cheaper than buying directly from an insurance company for three reasons:

1.First, the broker has access to a large number of companies, so they’re able to quickly and easily search for cheaper policies that match what you want.

2.Second, a broker typically does a large amount of business and can often access volume discounts from insurance companies that the general public can’t. They receive commissions from the insurance companies they work with, and sacrifice some or all of these earnings to maximise the premium savings for customers.

3.Third, a discount broker does not offer any financial advice so won’t tell you which policies will work best for you. This way, the brokers operating costs are reduced which is passed on to you in the form of commission discounts.

This third reason is perhaps the only real disadvantage of using a discount broker. When it comes to deciding which policy will best meet your needs, you’re on your own, which means you must spend time researching various policies so you can decide which will provide the most advantages.

But the main reason for using a discount life insurance broker is the cost. By sacrificing some or all of their commissions, your premiums can be reduced by 20%PRCTG%-30%PRCTG% when compared to buying exactly the same policy from the same insurer. If you compared the savings to buying cover from a bank or mortgage lender, the savings can be even higher.

Finding discount life insurance brokers online isn’t difficult, but it can be tough to sort through them all to find the best. Don’t assume that all brokers are created equal; they vary widely in the amount of commission they will sacrifice and in the number of life insurance companies they have access to. When you’re searching for a broker, look for one who offers minimal fees and has access to a large range of insurance companies. They’re the ones who are most likely to give you the best prices.

Using a discount broker isn’t necessarily faster than buying direct from an insurance company. Instead of spending time comparison shopping for insurance, you’ll most likely end up shopping for brokers, instead. However, even if you don’t save much time, you’ll save some money by using a discount life insurance broker.

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