No matter how young or old you are or how much you earn every month, you should invest in life insurance. Unfortunately, many people don’t understand the importance of being covered. Note that being under-insured is better than being totally unprotected.
Not having adequate cover can lead to financial troubles if you’re ever in an accident or fall sick suddenly. According to financial experts, Americans in their 20s and 30s are the most vulnerable age group to being uninsured. That’s the time when you should purchase adequate insurance to protect your wealth.
How to calculate the cost of life insurance?
Even if you’re willing to invest in life insurance, you’ll wonder how much you should actually spend on life insurance. The general rule is to calculate long-term financial obligations and calculate the value of assets. The answer you get should be filled by the cost of life insurance. But it becomes difficult to determine what to include in the calculations. Here are some tips that can help you.
Multiply monthly wages by 10
It’s an old rule, but many experts still recommend it. With the current economic condition and rising interest rates, it’s somewhat outdated. Note that both and your spouse must be insured even if you don’t earn. That’s because if the person who doesn’t earn dies, you’ll have to find someone that does what the deceased did for free. That’s not something you can ask from anyone.
Consider $100,000 for education
Expenses for education are a significant component when calculating the cost of life insurance if you have children. This aspect adds another layer to multiply the income by 10.
Take a detailed look at your finances
After understanding your individual financial condition, you should delve deep. It’s time to take into account debt, income, mortgage, and education.
– Add up all the debts, leaving your mortgage along with a rough estimate of your funeral expense.
– Determine the number of years your family would be dependent on you and multiply the yearly income by that number.
– Find out the amount you’ll need to pay off your mortgage.
– Finally, calculate the cost of sending your children for higher education.
This formula is comprehensive, but it doesn’t consider the insurance coverage or savings you have at present.
Find the accurate cost of life insurance
Your last step is to find out the cost of life insurance. For this, you must calculate your financial obligations and subtract your liquid assets from the value. Find out the values of the following and add them:
– Annual salary
– Mortgage balance
– Other debts
– Future expenses such as higher studies abroad
– If you don’t work, you’ll have to include the costs of replacing the services that you provide.
After receiving the figure, subtract your liquid assets, which include:
– Current savings
– Existing funds
– Present life insurance
Consider the cost of life insurance as a component of the overall financial plan rather than planning it in isolation.