The key to creating a sound financial plan begins with making sure that family members are protected, if you are no longer in the picture. Life insurance is a way to protect those family members. Indeed, purchasing life insurance is a major step and decision. However, most people do not know the best way to calculate life insurance coverage needs. Some might select figures out of the air, while others use a proven method that delivers the right results. First, determine if you really need life insurance. You probably require insurance, if you have a spouse and kids. Next, determine the type of insurance that you should purchase. For example, should you purchase term life or whole life insurance?
Below, one rough life insurance coverage calculation is mentioned which is one of the most popular one in life insurance industry. So you can try that.
Proven Method to Calculate Estimated Life Insurance Coverage:
The amount of coverage needed should provide enough to cover debts and sustain your family’s current lifestyle for well into the future. Sit down and take a look at your current situation. Determine the amount that you pay on debts each month. How much do you spend on other necessities? How much do you like to bank per month in savings? Add those figures up. Multiply by twelve for an annual amount. This is the real amount required to sustain your family’s current lifestyle for a year. Multiply that number by 10 to calculate life insurance coverage.
For example, your annual income is about $50,000 yearly. Thus, $500,000 is the necessary amount of coverage required for remaining family members to sustain their way of life and pay off outstanding debts, according to this method. This is a very simple formula that makes it easy to identify the amount of life insurance that is required. Take a hard look at the numbers. The figures should match or exceed the amount required to sustain current lifestyle. However, it should only serve as a basis to get you started on determining the actual amount required.
So, now you know that with that amount of life coverage your family is safe or at least they can survive for some time being before there is another breadwinner in the family. But apart from that, take into account the money depreciation factor which means the value of money is going down every year. So, you should consider higher life insurance coverage. Also, if you die the family members will need immediate money to arrange funerals (..get more information on how funeral insurance works). You would not want the family to be burdened with this cost, so make sure there is enough financial arrangement for this as well.