When purchasing life insurance, the question really isn’t how much you need, but how much your family will need at the time of your death to meet immediate obligations (medical bills, funeral costs, estate taxes, unpaid debts) and to sustain your dependent’s financial needs in the long run.
Life insurance is an important component of any financial plan. This quick activity will help you determine how much life insurance coverage is needed to help secure your loved one’s financial future.
First, how much do you have now? What’s in your savings? Your investments (like your house, land properties, mutual funds)? (List them down and add them up. This are your ASSETS.)
WHY do we need this figure? You will need this amount so that you can figure out how much your estate taxes will be. Estate tax is a tax imposed on the net value of the estate of a deceased person before it is given to the heirs. In the Philippines, it is approximately 20% of the current value of the asset/s.
Second, how much debt do you have other than for your mortgage? How much money do you owe (personal loans, auto loans, credit card debts, salary loans, etc.) What other personal financial obligations do you have? (List them down and add them up. This are your LIABILITIES.)
WHY do we need this figure? If you have debt, you’ll have to buy more life insurance to pay it off. In the event of your death, you may want to ensure that your surviving family doesn’t have to worry about paying your mortgage or other debts. You may want to leave them with enough simply to pay off the debts right away.
Third, how much money would your dependent need to maintain their standard of living? How much income would your survivors need if you weren’t around and for how long? How much will be needed to spend to pay for your children’s education? How much would the family need to cover funeral/burial expenses, and or special care needs (for example, if you’re taking care of an elderly relative, who will do it when you’re gone?). How would inflation affect the amount of coverage over time? (List them down and add them up. This are the LIVING EXPENSES.)
For example: If your family’s living monthly expenses is Php 25,000 and you want them to be financially secured for the next 5 years, you would want to be at least covered for Php 1,500,000. (Php 25,000 x 60 months)
WHY do we need this figure? This will help you estimate how many years of income replacement they’ll need if you were to die. You can’t protect your family if you don’t know this number, so make sure you have an idea on what the figure is. Otherwise, if you don’t think it through, it may not be enough.
Fourth, what insurance policies do you have? How much are you covered for? Does your employer provide you with an insurance benefit? How far do they go to meeting your needs? (List them down and add them up. This are your INSURANCE policies.)
WHY do we need this figure? This will help you estimate how much insurance you still need to buy to cover your dependent’s needs.
Fifth, we will now use the formula below to compute how much life insurance coverage you need. You can also just download the worksheet, fill up the boxes, and it will be automatically computed for you. Otherwise, here goes…
minus TOTAL LIABILITIES
plus ESTATE TAX (Total Assets x 0.20)
plus LIVING EXPENSES (Estimated Yearly Expenses x Number of Years)
plus EDUCATION COSTS
minus existing INSURANCE
equals LIFE INSURANCE COVERAGE NEEDED
From this computation, you will be able to know the amount/value of the life insurance needs that will be able to cover the immediate costs of your death (funeral and burial costs), unfreeze your assets (estate taxes), send your children to school (educational costs), pay debts and mortgage and help them survive a few years (living expenses).
This is just a ball park calculation. So, I hope it’s pretty close to what you’ll need and it’s a calculation you can do yourself. It’s also a lot better than a just guessing.
Lastly, get a term life insurance. Once you arrive at a figure, I recommend getting a TERM LIFE INSURANCE because it is the most affordable type of life insurance. If your money is insufficient to get the needed insurance coverage, you can start by getting coverage that covers one part of the formula like living expenses. For example, the estimated living costs will be Php1,500,000 while the estimated education cost is Php 1,000,000. You can first get a policy with a Php1-5M coverage then, when your cash flow improves, you can get another insurance policy for Php 1-M.
I hope you learned something new today. Good luck!
photo credit: family – 0634 via photopin (license)