Last Modified on January 20, 2020

Insurance is a sensible way to infuse cash into your account for dealing with the adverse consequences of life. The agreement provides financial protection not only during your lifetime but even beyond. Buying an insurance policy can be seen as a sinecure. However, there are considerations you need to take note of before picking the right policy.  

It is important to analyze the ways in which you can benefit from the plan, the premium amount you can pay for a long tenure, and the insured sum you wish to aim for. These prerequisites can solve the equation of buying an ideal insurance policy. But even before that, you need to evaluate how much insurance you actually need. Even if you already have an insurance policy, you still need to know whether you are adequately insured or not. 

Many individuals believe that the question, ‘how much insurance do I need’, has a fairly complex answer. The reality, however, is far simpler. Here is a step by step guide to evaluating the amount of insurance you should look for:

Look into Your Family’s Present and Future Needs

Life insurance is not just about the amount of money you want during your lifetime. It is also about the financial help your family would want when you are not around. For this, you need to predict the needs of your family and do some calculations on the basis of eminent variables. Firstly, you need to consider the amount your family will need to secure immediate obligations. This shall would include:

• Funeral bills
• Estate settling bills
• Medical bills
• Mortgage balances
• College costs
• Loans
• Outstanding debts

The next step is to calculate how much money your family would require for sustaining their lifestyle needs in the future. You can do this by evaluating the present value of cash flow your family will need in the future. Inclusions like grocery bills, education costs, loan installments, medical bills, etc. can be reflected upon. 

By summing up the numbers, you will get an estimate of the premium and maturity amounts that you should aim for in your insurance plan.

Try the Life Insurance Calculator

The next step is fairly simple. Calculate the values and then do the math. For this, you need to know the numbers of the following values relating to your present lifestyle:

• The immediate expenses that your family will bear, like medical expenses and probate costs.
• The total number of years of financial assistance that you are aiming for. This is the time that you assume your family will require to get things back in motion.
• The net yearly income needed by your dependents.
• The money you have in your savings account at present.
• The number of children you have (biological and step-children). 

Now, let us assume that you have $5,000 reserved for the immediate expenses that your family may have to face. Additionally, you aim to give 10 years to your family to become financially stable and assume the yearly income required by them to be around $10,000. Let’s take $50,000 to be your total savings as of today. We will take the expense of one child here to be $4000. 

Now, the total amount you need will be the number of years, divided by the net yearly income, which in this case will be around $1,00,000. From this amount, you need to subtract the immediate expenses of your family and the estimated sum needed for your child’s education. You will get the answer to be around $91,000. And since you already have $50,000 in your savings account, the end result will be $41,000. 

To this number, we shall add a projected return on investment. We will take a 4% interest on returns as we are dealing with a horizon of 10 years here. The return will then be adjusted for a 2.5% standard inflation rate every year. The resulting amount will be around $51,220. Though this amount may differ depending upon the inflation levels and investment performance, the calculation method can be taken as an ideally uniform standard for all. 

Advanced Insurance Calculation Tips

The amount of insurance depends on the overall computation of debts, income, mortgage education, life savings, and other unpaid contributions. However, we would like to point out some peripherals so that your calculations are precise and functional. 

• Consider your insurance policy as a part of your major financial plan. You should avoid planning for insurance as a separate entity. The plan should also involve future expenses including the future growth of your income assets. If you are successful in estimating this equation, you can easily map the insurance amount on the top of the plan. 
• You should extend the total insurance amount a little more than the estimated coverage. Take note that your income is bound to rise over time, as well as your expenses. You might not be able to anticipate the exact numbers, but having a safe financial buffer will help your family maintain their lifestyle. 
• Discuss the numbers with your life partner. You might need to do recalculations after knowing the money estimates he or she has in mind. This is a great opportunity to analyze if your plan makes sense to your partner or not. 
• Always try to buy multiple smaller insurance policies. This will vary your coverage when your needs flow out of hand. The process will also reduce total costs while ensuring that you have enough coverage in the much-needed times. 
• Try going in for a long-term plan, preferably 30 years or above. When you take an insurance plan for a longer-term period, you are less likely to feel short of cover. You also won’t have to research for coverage plans again. Your older rates might even be higher, which gives you an edge. 

To Sum it Up

It is important to note that the key to insurance planning is to start early. Timely decisions backed by wise assessments ensure your financial stability during and after your life. Examining the above-mentioned points to calculate insurance in a careful manner will ultimately lead to larger savings for you and your loved ones. 

If you are finding it hard to decide the amount of insurance that is ideal for you and your family, you can get in touch with financial advisors for help.