Tips to determine how much life insurance you need

When considering life insurance, is planning and preparing for an event most of us prefer not to think. But life insurance represents a critical step in managing your personal finances and ensuring your family welfare.

the two approaches NEWS Life Insurance

You can use one of two approaches to estimate how much life insurance you should buy: the needs approach or the income replacement approach. Using the needs approach, calculate the amount of life insurance needed to cover the financial needs of your family if you die. Using the income replacement approach, calculate the amount of life insurance needed to equal the income your family will lose. Let's look briefly at each approach.

NEWS need much?

Using the needs approach, add the amounts that represent all the needs of your family will have after his death, including funeral and burial costs, uninsured medical expenses and property taxes. However, his family depends on you to pay for other needs, such as your child's college tuition, business or personal debts, and food and housing costs over time.

The needs approach is somewhat limiting. The task of identifying and counting the family needs is difficult, separating the true needs of your family what you want for them is often impossible.

Income Replacement NEWS

Using the income replacement approach for estimating life insurance needs, calculate the life insurance product that would replace your income for a specified number of years after his death.

The life insurance companies sometimes approximate your replacement income at four or five times your annual income. A more precise estimation considers the actual amount of family members need annually, the number of years they will need that amount, and the interest rate your family will earn on the proceeds of life insurance as well as inflation during the years when his family is based on the life insurance benefits.
Note: Remember that you as quantify the income you want to replace Social Security provides generous survivors benefits if you graded. These benefits can easily total $ 2,000 per month or more.

NEWS replacement Calculation of amounts of income with Excel

If you have access to a computer with Microsoft Excel, the popular spreadsheet program, you can use your computer to calculate the amount of insurance you need to replace a number of years of income. Suppose, for example, you want to buy enough life insurance to replace income of $ 50,000 a year working for 15 years. If the figure of his family will earn 5% on the proceeds of life insurance if the worst occur, you enter the formula in a cell in an Excel workbook to calculate the amount of replacement income life insurance :

=- PV (5%, 15.50000)

Excel returns the formula result 518,982.90 indicating that it would take approximately $ 520,000 of life insurance, invest at 5%, to pay $ 50,000 a year for 15 years.

NEWS Two Calculation Tips

If you factor in inflation, because you're trying to replace income over a long period of time, you should use a real rate of return and not a regular rate, or nominal return.
To calculate a real rate of return, subtract the inflation rate of the interest rate in the formula. For example, if you expect 2% inflation, which could replace the above formula, using this formula:

=- PV (5% -2%, 15.50000)

Here's a tip final calculation: You probably want to round number. For example, if the formula provided earlier returns the value of 518,982.90, you might want to round this to $ 600,000. Or $ 750,000.