How Much to Insurance Cover
From Financial Literacy Wiki
How much insurance cover should one get? There are two approach to determine the amount of life insurance cover one needs.
Multiple Earnings Approach
The multiple earnings approach involves multiplying your yearly gross salary by an arbitrary number, usually 3-10. This method provides a rough approximation of your life insurance needs. As such, this method fails to take into account your financial needs and resources.
Needs Approach
For needs approach, there are five steps to determine your insurance needs.
Step 1
The first step is to determine your objective of buying. Life insurance can provides funds for the following:
- Paying outstanding housing loans.
- Settling other outstanding debt.
- Providing for children's tertiary education.
- Providing for spouse's retirement.
- Providing liquidity for family.
Step 2
Second step is to estimate amount of funds needed. Once the objectives of buying is determined, the next step is to make an estimate of funds needed by your dependents if you should die immediately or at some assured future date, for instance providing for your children's education needs. Please remember to take into account of inflation. Failure to do so would result in your family being under-insured.
Step 3
Step number three is to compute how much financial resources you have. Knowing how much financial resource you have to satisfy the objectives determined from the first step will ensure that you do not over-insure.
Step 4
After step number three, you would be able to see how much insurance you need.As we move through different life stages, there would definitely be changes in our insurance needs. As such, one should review their insurance plan from time to time. The review should be done, preferably every five years or if there are major changes in your family situation for instance purchase of new home or the news of an additional member to your family.
Step 5
Once you have identified and quantified your insurance needs, you can design an appropriate insurance policies to meet those needs. Thus providing financial protection for your dependents.
