Once you decide to buy life insurance to protect your family or dependents, you’ll need to figure out how much to insure and how much you can afford to. The idea is for your beneficiaries to be able to maintain their standard of living, without having to dip into the principal. Some say it is best to buy about 8 - 10 times your current annual salary, but the best way to determine how much it will really take is to do some calculation. Basically determine your yearly household expenses, assets, income from all sources and debts if any. Most of the time people take assistance from the professionals in decision making. Beware of the person you choose is objective and will not try to sell you more insurance than you need. So figuring out how much insurance you require is more important than the type of policy you purchase. It means you have to make more efforts to gather the information you need and calculate the following:
It is the amount your dependent will need to maintain their standard of living as of today. This should be enough to cover your rent or mortgage, home maintenance and repairs, home improvements, household items, and real estate taxes and insurance. It should also include health and auto insurance, utilities, clothing, food, transportation and auto maintenance costs, plus child and dependent care, recreation and entertainment, and any other expenses they might have.
Income your dependents will have when you are gonespan This will include your spouse’s salary if working outside the home and investment income from all of the accounts you currently have. Do not include the insurance proceeds as income here.
The difference between what your dependents need and what they will have
Deduct annual income from dependents income and you will have determined how much more they will need to live comfortably.
Once you know how much they will need, factor the equation into how much you can afford to invest. Be certain to ask about how the insurers calculate their rates so you pay the lowest premium possible for the best coverage. Shop around, as rates do vary from insurer to insurer.
Determining Risk Group
Insurance companies generally divide us into four risk groups, preferred, standard, substandard or uninsurable.
Preferred – You are a low risk. You are not sick; don’t have a high-risk job or hobby, have a clean bill of health. You pay a lower premium.
Standard – You are an average risk. There might have had been some health issues in the past, but don’t have a terminal illness or a high-risk job or hobby. You pay an average premium for similarly situated insured.
Substandard – You have a high-risk job, such as pilot, scaffold worker or diver, or you have a chronic illness like diabetes, heart disease or high blood pressure. You pay a high premium.
Uninsurable – You have a terminal illness thus are a high risk. Insurer will be reluctant to sell you a policy. Take note that the categorization may differ from company to company, so shop for insurance with other companies whatever the ‘label’. If you have or had an illness or health condition, it is best to get in touch with a professional who deals with and get you better quotes from different insurance companies. Once you are rated “substandard,” you must disclose it to all the other insurance companies when you apply for coverage.