How much Life Insurance Do I need
There are two methods to calculate how much life insurance you require:
- Human Life Value Method
- Needs Analysis Method
Human Life Value Method
This method calculates the present value of a person’s future earnings to determine the appropriate amount of life insurance coverage. Here’s how it works:
Estimate Future Earnings: The first step is to estimate the individual’s future earnings potential. This involves considering factors such as current income, expected career progression, inflation rates, and potential income growth over time.
Adjust for Expenses and Liabilities: The present value of future earnings is adjusted to account for expenses and liabilities that the individual’s income would have covered, such as mortgage payments, living expenses, education costs for children, outstanding debts, and any other financial obligations.
Discount Future Earnings: Once future earnings are estimated, they are discounted to their present value using an appropriate discount rate. This accounts for the fact that future earnings are worth less in today’s terms due to the time value of money.
Calculate Insurance Need: After accounting for expenses and liabilities, the remaining present value represents the individual’s human life value – the amount of life insurance coverage needed to replace their income and support their dependents in the event of premature death.
Disclaimer: The calculator calculates based on the inputs given to it. This amount does not construe financial advise. For Appropriate financial advise please contact us on number mentioned in the website.
Needs Analysis Method
The Needs Analysis method takes a more comprehensive approach by considering various financial needs and goals of the insured individual and their dependents. Here’s how it typically works:
Identify Financial Needs: The first step is to identify the financial needs and financial goals of the insured individual and their dependents in the event of premature death. This includes immediate needs such as funeral expenses and outstanding debts, as well as ongoing needs such as income replacement, mortgage payments, education expenses for children, and healthcare costs.
Estimate Future Expenses: Next, future expenses are estimated for each identified need. This involves projecting the cost of fulfilling each financial obligation over time, taking into account factors such as inflation and changing financial circumstances.
Assess Existing Resources: The analysis also considers any existing financial resources that could be used to cover these needs in the event of death, such as savings, investments, existing life insurance policies, and other assets.
Calculate Shortfall: After estimating both the financial needs and existing resources, the shortfall is calculated by subtracting the latter from the former. This represents the additional amount of life insurance coverage needed to adequately protect the insured individual and their dependents.
Review and Adjust: The needs analysis should be periodically reviewed and adjusted to account for changes in financial circumstances, such as marriage, the birth of children, changes in income, or significant life events.
These Methods provide a guide to how much insurance you should take or your life. Consult us to plan your insurance and finance planning needs!