Circumstances, such as age, medical conditions or interest rates, can significantly complicate the question of how much life insurance you need. The insurance industry itself suggests different approaches.
Life Insurance Formula I Use
Start with your current annual salary, after taxes. If your family will need this amount of net income at least, you will have to provide enough capital to generate this amount. For example, if your net contribution is $25,000 a year, your family needs $1,000,000 at 5% interest to continue to generate that amount of income. In fact you’ll need more, as taxes have to be paid on that $25,000 interest you receive.
In concrete terms, the life insurance beneficiary gets one cheque. Then, immediate expenses are paid. After that, the remaining sum is invested, so that replacement income can be paid out monthly from the investment income it generates.
Life Insurance Capital Investing
And it is this part that many people fail to understand. Yes, you pay immediate expenses, but you can’t just spend the balance of the capital. The money must be invested to provide an income which continues to support the family. It's only after children are grown and gone, that perhaps the capital can be invested in a very safe investment such as a life annuity, which will provide an income forever for the remaining spouse.
Life Insurance As a Retirement Plan
If this plan is followed, and you arrange an investment to provide income now, the capital will still be available to keep providing protection for many years to come. If you buy insurance with this plan in mind, then you have capitalized on one of the great uses of life insurance.
About The Author:
Ivon T. Hughes of The Hughes Trustco Group is a licensed Insurance Broker. Author of The Life Insurance Handbook. - Get a FREE Copy TODAY!
Email: info@trustco.ca Web: http://www.hughestrustco.com
