Here I will describe most useful concept one need to know before buying any Insurance
There are multiple calculating methods with main focus on needs of survivors in case of death, let’s discuss one by one:
1. Evaluate Principal to Generate sufficient Income Here, you estimate the amount of Principal needed to generate the annual income that your survivors will need once you are no more. For example, if you determine that your survivors will need 35,000/- per year, you might go for purchasing insurance in the amount of 5,00,000/-
The key here is to know how much annual income your survivors will need. Following steps will help to determine annual income
Step 1 – Determine annual income: Determine the annual income family would need considering lifestyle, rent, groceries, clothing, bills, travel etc
Step 2 – Subtract currently available income from annual income: Subtract another income source, such as employment income, interest income that would add to required annual income. This will help in gathering exact information.
Step 3 – Determine the principal needed to generate annual income: For example : If from step 2 you have found that you need annual income of around 35,000/- and with average interest rate prevailing market say around 7%,your principle would be 5,00,000 i.e.35,000/0.7 = 5,00,000
Step 4 – Add one-time expenses and Subtract one-time gains: Add one-time expense like funeral expenses, administrative expenses and subtract one-time gains like selling an asset from existing business. This amount needs to be applied to the amount generated in step 3 to determine the final figure.
2. Multiple of current Income Method It’s simplest where you multiply annual income in a range from 7 to 14 to determine insurance amount. But this may end up causing regrets for the survivors since due lack factors which were missed during estimation.
3. Getting help from website Available Online calculators can assist in determining annual income for survivors, how much amount of insurance you should buy to generate this income. But before this, you must have understood the basic concepts as discussed above to get exact idea and make sense of buying insurance
Some most trusted online help include:
- Life and Health Insurance Foundation for Education: (www.life-line.org) includes a calculator that can assist in determining insurance.
- The Insurance Information Institute: (www.iii.org) contains information and a calculator along with planning priorities across various stages of life
Lastly, I hope you have got the basic idea about calculations one must do before purchasing any life insurance. At least do some researches if you are planning to buy from some financial institutions since you know your requirement much better than the third party.