Making decisions regarding life insurance may seem simple enough if you believe what you see and hear in television and radio advertisements. However there are many things to consider and wading through the sales pitches to find truly helpful information can be a bit more challenging. So how do you decide how much coverage is appropriate?
Many insurance agents and other ?pundits? use a multiple of salary approach to finding an answer to this question. They will tell the unsuspecting would-be insured that they need 7, 10 or even 20 times their income in coverage. While this can be a useful rule of thumb to begin the discussion, this guesstimate is inadequate.
The proceeds from life insurance are intended to provide relief for the survivors in three key areas; paying off debts and final costs, replacing lost income, and setting money aside for those things you were saving for, like education.
The multiple of salary approach is too simplistic and fails to take into consideration other sources that can offset some of the need, such as savings, investments and an increase in earnings as the survivors alter their employment in response to the loss.
A proper survivorship analysis will take all of these things into consideration as well as future earnings on investments, increases in pay, children growing up and leaving home and inflationary effects. It is important to have a survivorship analysis done when first making the coverage decision and again each time your circumstances change or at least at annual reviews.