Life insurance needs vary depending on your personal situation. If you have no dependents, you probably don't need life insurance. If you don't generate a significant percentage of your family's income, you may not need life insurance.
If your salary is important to supporting your family, paying the mortgage or other recurring bills, or sending your kids to college, life insurance is important to ensure that these financial obligations are covered in the event of your death.
How Much Life Insurance Do I Need?
It's difficult to apply a rule-of-thumb because the amount of life insurance you need depends on factors such as your other sources of income, how many dependents you have, your debts, and your lifestyle. The general guideline is between five and ten times your annual salary.
What Type of Policy Should I Buy?
The debate over term versus whole life insurance goes on. Some experts recommend that if you're under 40 years old and don't have a family disposition for a life threatening illness, go for term insurance, which offers a death benefit but no cash value.
Whole life offers both a death benefit and cash value, but is much more expensive. Half of all cash value policies are surrendered within the first seven years, making the coverage very expensive because huge commissions (thousands of dollars the first year) and fees limit the cash value in the early years. Since these fees are built into the complex investment formulas, most people don't realize just how much of their money is going into their insurance agent's pockets.
Whole Life
In this more traditional life insurance policy, the premiums stay the same over the life of the policy, which stays in effect until your death, even after you've paid all the premiums. A cash reserve is built up, but you have no control over how it's invested.
Variable Life
Variable life polices build up a cash reserve that you can invest in any of the choices offered by the insurance company. The value of your cash reserve depends on how well those investments are doing.
Life Insurance Worksheet
| 1. Your dependents' annual expenses, including mortgages, loans, credit card debts | RS___________ |
| 2. Your dependents' sources of other income, including salary, interest and dividends, social security, pensions, etc | RS____________ |
| 3. Additional income needed (subtract line 2 from line 1 | RS____________ |
| 4. Divide line 3 by the interest rate you expect to earn (for example, if the prevailing interest rate is 8%, divide line 3 by .08) | RS____________ |
| 5. Face value of the policy needed | RS____________ |