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Life insurance is a type of protection from financial failure in the result of death. It is an agreement under which a life insurance company’s guarantee to pay a beneficiary a certain amount of money when the insured person dies in exchange for appropriate payment of the premiums.

Life insurance serves as the help in the case of the insured’s death. Life insurance provides the financial consolidation to the beneficiaries. It provides dependants with the essencial fund to settle financial responsibilities and to compensate for the losses of income because of the policy holder’s death. Usually life insurance policies are bought in certain objectives – to afford educational expenditures, to protect a mortgage or an estate, for donations, or for retirement.

People hold life insurances for countless number of reasons. Among all the most popular are to pay off personal debts (different loan or credit cards) or a mortgage, educational expenses for children, to provide the present standard of living for beneficiaries, for urgent financial needs, for child care, for medical and funeral expenses and many other.

With the time importance of life insurance may vary. If the person finished raising the family, paid off a mortgage, and does not have any financial responsibilities, then he or she would need the life insurance lesser than when he or she had all above mentioned. In this case the insured person may decide to decrease the coverage amount to a level that would be enough to make certain that his or her survivors will have the essential funds to compensate final expenses after the insured’s death.

Today all aspects of live involve a certain level of risk. It could be fire, car accident, injury and so on. Insurance provide the way of shifting the financial penalties of a certain risk from the policy holder to the life insurance company. When the person decides to buy a life insurance policy, a lot of factors are taken into consideration. They are age, sex, health status, occupation, and hobby, and so on.

Life insurance company estimates how many people of a certain group are expected to die in a period of time. The more death expected in a certain group, the more funds will be required to pay death benefits, so the more money will be claimed as the premium payments. Due to the fact that younger people are not likely to die as the older ones, so payment premiums will be lower for younger group.

The insured person has to pay the life insurance company so called ‘premiums’ on the annual basis. The insured has to estimate the beneficiary – the person who will receive the insurance money in the case of the insured’s death. This procedure usually calls as ‘designating a beneficiary’.

When you start searching for a good life insurance, you can get scared how many life insurance brokers are on the market. But number is not always about quality. Please learn more about choosing good life insurance brokers on this blog which is majoring on the life insurance brokers topic only.

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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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