What is the right amount of life insurance to buy?
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Asked February 11, 2013
Many people mistakenly believe that the value of a life insurance policy should be equal to their financial value. This is a mistaken assumption because a life insurance policy is usually intended to take the burden off survivors, not to replace the loss of your personal worth. How much life insurance you will need depends on a number of calculations, and is even modified by the type of policy and what it meant to provide coverage for.
For example, you might take out a term life policy to match the length of a car, home or boat loan. That would increase your basic amount of coverage, but the policies would become unnecessary when the property is paid for, and the po9licy would expire at around the same time.
You should also take into account your final expenses. Rather than leave the burden of your funeral and burial plot costs on your loved ones, plan for it by purchasing enough life insurance to pay for the costs. If you want to leave a trust fund for a minor child or favorite charity, calculate the amount you want to leave behind in your total insurance needs.
Next, you will need to calculate the needs of your spouse and dependents. The rule of thumb is to total your current annual expense for home, property, and lifestyle. This number is basically equal to your annual expenses. Multiply that amount by the number of years you want to provide financial security to your beneficiaries, and then add 5% back into that total to account for inflation over time. If you can afford to buy more coverage, it can only help those you leave behind.
Once you have added these insurance needs up, you will have an approximate value of your life insurance needs. If your budget will allow you to do so, add another 10% to account for any changes in your need that may develop after the policy is purchased. Keep in mind, too, that you can always supplement your existing life insurance with additional term or permanent life policies.
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Answered February 11, 2013 by Anonymous