How Much Life Insurance Do I Need?
There are plenty of methods out there for calculating your life insurance requirements, but what is the right method for you?
Over the years various insurance companies and financial commentators have come up with different ways of calculating life insurance requirements. There are also plenty of websites out there which claim to be able to calculate your needs.
Many of these systems are based on very simple calculations. For example some state that you should simply multiply your annual income by ten years, whilst others state that you should just cover your mortgage plus one year’s income.
The truth is that none of these systems are perfect, and they simply provide a guide rather than giving you a specific figure for your needs.
Today, financial advisers are required to take into account your personal needs and objectives when calculating your insurance requirements, but this wasn’t always the case.
In the past many insurance agents, as they were then known, estimated your insurance requirements by using very simple calculations.
Often the calculations were based on a multiple of the client’s annual income, however this was a seriously flawed idea since it did not take into account debt levels, the number of dependent children or any other factors that could affect someone’s life insurance needs.
Unfortunately, many financial commentators and websites can’t let go of these outdated methods, and still tell people that they should multiply their income by five or ten years to calculate their insurance needs.
Thankfully most qualified financial advisers have long known the dangers of this method, and now take a much more personalised approach to calculating the life insurance requirements of their clients.
Searching for life insurance calculators in Google will produce dozens of different results. Some of these calculators are on financial adviser’s websites, whilst others are on general finance and insurance websites.
You need to be very careful when using online calculators to determine your life insurance needs, as many of them do not collect sufficient information to give a proper calculation. The websites will generally have no legal liability if they give you a calculation that is inaccurate.
The Right Method
The most comprehensive way of calculating your life insurance needs is to first determine exactly what you want to happen in the event of your death.
Do you want your family to be mortgage free? Do you have any business debts which need to be cleared? How long do you want to provide an income to your family for? How much income will they need each year? Are there private school fees that need to be paid?
You must ask yourself all of these questions, and the answers will form the basis of how much life insurance you need. For example if you want to provide an ongoing income for ten years, you need to calculate the size of the lump sum to be invested to provide that ongoing income.
The life insurance needs of each person are truly unique, and by attempting to use generic calculations based on income alone you are putting the financial security of your family at serious risk.
This article is about life insurance and is general information only. It should not however be treated as factual, as personal advice or be the basis of purchasing any insurance policy. Before deciding on an insurance policy read the PDS carefully and talk to a licensed insurance agent if you need further assistance. MoneyBuddy does not recommend insurance products or provide personal advice in regards to insurance products.