When we think of life insurance, people generally take the shotgun approach and randomly pick an amount of insurance they believe to be sufficient to support their dependents in the event of their death. However, choosing the correct amount of insurance requires an approach that determines exactly what needs should be met. By understanding what our needs are and how insurance can fill those needs, we can better determine how much insurance is coverage is sufficient.
When shopping for life insurance, the majority of people only consider their earnings and look to life insurance to replace their income should they die unexpectedly. In order to calculate the necessary life insurance required, a person should approach the life insurance selection process from a total needs approach. By utilizing the total needs application, the primary income provider in the household meets the needs of the family immediately upon death and needs in the future.
Immediate needs are those needs required to meet daily expenses such as the monthly mortgage, car payments, clothing and food. Transitional need are funds made available to beneficiaries for life changes in the absence of the breadwinner such as moving expenses should the family need to move to another location. The amount of debt owed is another consideration when determining the amount of life insurance needed. Debt elimination in many cases will be a major concern for a the remaining spouse and life insurance should provide a way to eliminate all or a large portion of outstanding debt.
One of the most important applications of life insurance is spousal income over the life of the remaining spouse. In many cases one spouse earns many times more than the other spouse and maintaining their level of daily living is a considerable concern. Life insurance can be utilized as income replacement, however careful consideration is needed when determining how much insurance is required to meet this individual need along with other needs and what is affordable to the family budget.
If a primary breadwinner has children, educational issues are another need to be considered when determining the total amount of life insurance needed. A college education is important and expensive. In this area when approaching needs, some people consider purchasing a separate life
