How To Calculate Your Life Insurance Needs
Most of us have a basic understanding of what life insurance is and how it can support our loved ones. However, not many realise the importance of calculating their needs before investing in a policy. Life insurance should be enough for our loved ones to cover all financial obligations in the event of our passing. This might include mortgage payments, education costs, paying off debts, and everything in between. So, where do we start when calculating our life insurance needs? Today, we are going to give you a brief overview of what we should be assessing before taking out a policy and why it is important to regularly review the policy we already have. This will help you ensure you’re always keeping on top of your policy and providing the necessary information for your life insurance calculator and your advisors to get it right.
Why it is Important to Review Your Policy Regularly
Throughout life, we encounter numerous significant changes, and leaving our life insurance policy unchecked may result in it not meeting our current needs. Marriage, birth, mortgages, businesses, education, and career development are all reasons to review your current policy. If we don’t make necessary adjustments with every milestone we reach, our coverage amount may not be able to provide the support our loved ones will need in the event of our passing. We recommend reviewing a life insurance policy every six to twelve months. Doing this can provide tremendous peace of mind to us and our loved ones.
What Factors to Consider When Taking Out a Policy
There are several factors we must consider when assessing our financial situation to calculate our needs when taking out a life insurance policy. Simply put, life insurance should cover all financial obligations in the event of our passing, so the coverage amount should be significant. The best way to get an idea of the coverage amount you need is to consider the following:
Will it replace my income?
The primary function of life insurance is to replace lost income. A life insurance policy should cover roughly ten years of an individual’s annual salary.
Will it help with debts and liabilities?
Life insurance should be able to cover all outstanding debts, such as a mortgage, personal loans, and car loans. It is essential to factor all this into the total coverage amount to ensure we don’t leave anybody under financial strain.
Will it pay for my children’s education?
If you have children, it is crucial to consider their future. A coverage amount that can meet their financial needs will help support their long-term goals.
Will it cover the taxes on my estate?
If you have assets that may incur taxes in the event of your passing, you must take this into consideration. After all, being able to cover these fees will ensure your loved ones can keep on track with their financial obligations.
Assessing and Calculating Your Financial Situation
Before taking out a life insurance policy, it is essential to ensure it will cover everything you need it to. To do this, you will need to take the time to work out all future financial obligations and liabilities. Once you’ve done this, you will then need to thoroughly assess your current assets. This includes retirement accounts, investments, property, and savings. Then, you will need to subtract your financial obligations and liabilities from the total value of assets to determine your net worth. Then, it will be time to evaluate how much additional income your family will need in the event of your passing. These calculations may sound a little complex, but they can be done simply with online life insurance calculators or the help of a professional advisor.
To conclude
Life insurance is an invaluable investment that can ensure your family encounters no financial hardship in the event of your passing. However, when taking out a policy, it is crucial to assess everything correctly to determine how much they will need. Without calculating life insurance correctly, it is likely the coverage amount will not suffice.
