Life insurance is the foundation of a sound financial plan. It provides financial security for your family by protecting your financial resources, such as your present and future income, against the uncertainties of life.
More specifically, life insurance provides cash to your family after your death. This cash (the death benefit) replaces the income you would have provided and can meet many important financial needs: it can help pay your home loan, run the household, pay for your children’s education, and ensure that your dependents are not burdened with debt. The proceeds from a life insurance policy could mean that your family won't have to sell assets to pay outstanding bills or taxes. Also with current legislation, life insurance benefits are not taxable.
Most people with dependants need life insurance. While there are no hard and fast rules for evaluating specific situations, one common practice is to buy life insurance equivalent to five to ten times your annual gross income. To determine how much, if any, life insurance you need, start by gathering all your personal financial information and estimating what your family will need after you're gone. Include ongoing expenses (such as day care, tuition, or retirement) and immediate expenses at the time of death (like medical bills, burial costs, and estate taxes). Your family also may need funds to help them readjust: perhaps to finance a move, or pay expenses while job hunting.
Choosing a life insurance product is an important decision, but it can be complicated. As with any major purchase, it is important that you understand your family's needs and the options open to you.
So, how much life insurance do you need?
- How much will be needed at death to meet immediate obligations
- How much future income is needed to sustain the household.
The first category is fairly easy to estimate. It's the sum of final expenses (including uncovered medical costs, funeral expenses and final estate-settlement costs) and other lump-sum obligations (such as outstanding debts, mortgage balance, and college costs).
The second variable is a bit trickier. It involves calculating the "present value" of future needed cash-flow streams. By contacting a professional financial advisor, you can get a more accurate and detailed analysis according to your personal requirements and help evaluate your specific situation.
There are various life insurance products available, which include Term, With Profits, Loan Protection and Unit Linked. Looking at the personal circumstances of the individual enables the financial advisor to select the most appropriate product for the client.