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Life Insurance Explained: How Much is Enough? (Part 5 of 5)
Posted on March 13, 2008 at 12:58 pm
Filed Under Financial Planning, Insurance Planning, Personal Insurance
In the final post of our “Life Insurance Explained” series, we want to answer the question “How much is enough?”
There are many different ways to determine how much life insurance is needed, but it is essntial to know that there is no “one size fits all” formula. Each situation is different and it is important that the formula you use to define this all important number is specific to your own situation.
Your Take-Away: Of the different formulas that are available, let’s look specifically at two of them.
The first formula that some of the more experienced generation of Advisor’s use is to simply define the income you would want replaced and then determine how much capital is required to provide that income stream at an assumed interest rate. For example, if you lost your Spouse or Partner and you needed a $100,000 income to properly maintain your lifestyle, you would need approximately $2,000,000 of capital invested at 5% to earn the before tax income you are looking for.
The second, and somewhat more specific formula is to actually take into consideration items such as your assets, liabilities, income needed AND for how many years that income is needed. The best way to use this formula is to work with a life insurance calculator. Most banks, insurance or investment companies all provide this tool for consumers and it is definitely worth referencing when trying to determine what you require. One great calculator for this purpose can be found on the Manulife Financial website.
In the end, it is always best to seek the advice of a qualified Professional, but it definitely doesn’t hurt to learn for yourself how these assumptions are used and how much life insurance actually is enough.
Until next time, have a Terrific Thursday.
Chris & Elisseos
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[…] Life Insurance Explained: How Much is Enough? (Part 5 of 5) In the final post of our “Life Insurance Explained” series, we want to answer the question “How much is enough?” There are many different ways to determine how much life insurance is needed, but it is essntial to know that there is no “one size fits all” formula. Each situation is different and it is important that the formula you use to define this all important number is specific to your own situation. Your Take-Away: Of the different formulas that are available, let’s look specifically at […]