While majority of people usually ponder on taking a life insurance cover, there is always an outstanding question which mutely follows unanswered and that is “How much is the value of my life?”Even though this question has been a head-scratch to many, only few have been candid on discussing it with others, ending up picking an arbitrary value as life insurance cover to replace the income they expect to make between now and retirement. Some have even gone further to buy only enough life insurance to cover your present debts.
However, though you probably can do all of those, calculating a sufficient life insurance cover would require you to do an inventory of all of your finances, and forecast on your commitment to enable your beneficiaries to maintain their lifestyles without you.
When drawing up your financial plan and choosing life assurance products with assistance from your financial adviser, you should work out how much life cover you need.
Usually it is imperative you do this so that your dependants are not left with an income deficit should you die.
The primary purpose of life insurance is to provide risk cover that offers financial protection to a policyholder’s dependants in the event of the policyholder’s death.
One needs to have enough life insurance so that his or her family can continue with their current lifestyle even if the breadwinner passes away.
Like every financial decision, life insurance shouldn’t be arbitrary in that if you under-insure, you risk causing financial hardship to your dependants; if you over-insure, you waste money paying for something you don’t need.
The amount of insurance you need depends on your personal circumstances, which comprises of many variables. Before any commitment, you should assess your life assurance needs with an emphasis of having sufficient life assurance for your family to maintain their standard of living when you die, but not about making your family rich.
Because life assurance comes at a cost, and should be in place to protect and provide for your dependants, if they have grown up and become financially independent, you should reassess your life assurance requirements.
Therefore, the value of a sufficient cover can be almost any number and will depend on personal circumstances, the needs of your family and dependants, and quite simply, how much you can afford in monthly premiums.
Though no universal method has been approved for calculation, pundits say the best way is through a needs-based analysis, which can be broken down into a simple formula: add your short and long-term debts and your family maintenance expenses and subtract your resources from your total expenses to arrive at the right amount of cover.
Short-term need
In this case, short-term needs would include final expenses such as medical, hospital, and funeral expenses, executor fees, probate court costs (if you do not have a will), and any outstanding taxes that would need to be paid if you died with outstanding debts.
This is then followed by calculation of family maintenance expenses including such necessities as childcare, food, clothing, utility bills, entertainment, travel, and transportation. This is done based on a year’s worth of expenses multiplied by the number of years you want to provide this income.
To this, add your long-term debts, which include your mortgage and college tuition. Calculating an education fund would prove a daunting task because you have no idea where your children will be going to college.
However, the best method is to use the present average college cost and the number of years remaining for your children to join college. This should factor in the increased costs of education each year.
Now you’ve a tally of income needs. It would be prudent to take an inventory of resources you have to meet them.
To do this, add all available savings, stocks, bonds, mutual funds, existing life insurance (such as group life through your employer), and social security.
Also add your present salary, and assume five per cent compounded interest each year if you expect salary increases over time. It’s vital to count only liquid assets (those that could be quickly converted to cash).
You shouldn’t count items such as your home or automobile, because selling them for cash when you’re gone would mean changing your family’s lifestyle. To this, add short and long-term debts and family maintenance expenses and subtract resources from total expenses.
The figure you get should represent the sum assured of the life insurance. It is at this time that the affordability of the quoted premium will be emphasised by the prospect
But while doing the math, consider that the future value of money is essential, especially with the eye on the inflationary pressures or what the death benefit will be if the money is invested at a given interest rate.
Experts say an analysis should be done at least once every three years or when there is a major life change.
For example, if you have a new baby, you have to recalculate college education needs and child-care costs. If you own a home, a mortgage is likely your biggest financial burden. Because your mortgage balance decreases with each payment, it’s important to include revised figures in your calculations.
Temporary cover
With this calculation of the human life value, you can assess whether your group life cover offered by the employer is adequate and if insufficient to consider an addition to bridge the gap.
But as the routine goes, a group life cover resembles an apron that is worn only while on duty and is usually replaced with a decent etiquette when on a serious travel outside the office.
This implies that a group life cover acts as a temporary cover when in employment. But with an additional cover, you would be able to enjoy benefits even while outside the employer’s service.
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