Amount of life insurance to own

 When one decides to purchase the life insurance policy. The next step as to determine the appropriate amount of life insurance to own it is the determination of the amount to be insured. The insured amount should be determination based on the income of the insured however the correct amount of life insurance to own is the personal matter because the family needs and financial goals vary widely from family to family.

 However there are some rules regarding the determination of amount of life insurance to own based on data provided by insurance companies and experience it is found that people have generally insured the amount about six to ten times more than their annual earnings . so some financial planners have proposed certain arbitrary rules for determining  the amount of life insurance to own such as six to ten times annual earnings. But this rule is not scientific and meaningful. Because they do not take into account the family size income financial goals standard of living and needs which may very from in family

 Basically there are three modern approaches to estimate the amount of live insurance to own which are as given below

1.       Human life value approach: when family head dies prematurely the breadwinner’s earning is lost forever. This is the loss of regular income essential for livelihood of continued life of surviving family members. This is known as the human life value. The present value of the family’s share of the deceased breadwinner’s future earnings is called the human life value. It can be calculated by the following steps:

a.       Annual earning calculates the average annual earnings of the insured over his productive lifetime.

b.      Deductions: deduct life and health insurance premiums the costs of self maintenance and state income taxes. The balance remained is the share to support the family of insured.

c.       Number of years: determine the number of years from the insured’s present age to the contemplated age of retirement.

d.      Present value: determine the  present value of the family’s share of earnings using

2.       Need approach: the amount of live insurance to own can also be determined from needs approach. Under this method the various family needs that much be met if the family head should die are analyzed and the amount of money needed to meet these needs is determined the amount  of existing life insurance and financial assets is then subtracted from the  total amount needed. The most important family needs are given below:

a.       Estate clearance fund: it is the fund needed for funeral expenses medical bills inheritance income taxes etc

b.      Income during the re adjustment period: it is the period given to the family to adjust the living standard to a different level, during this period the surviving family should be given approximately the same amount of income received while the family head was alive

c.       Income during the dependency period: the period follows the re adjustment period. It is the period until the youngest child reaches the adult age. In this period the family should receive income enough for livelihood of surviving family. If the surviving spouse earns money the income needed is substantially reduced.

d.       Life income to the surviving spouse: the main objective of life insurance is to make life income to the surviving spouse. If the surviving spouse is older and has been out of the labor force the significance of life income becomes even greater.