How Much Life Insurance Coverage?

It is not uncommon that sales agents would just offer you a proposal for life insurance with a face amount of P1 million. You may think that P1 million is already big but if the insured individual is the sole breadwinner of the family, his demise will potentially wreak havoc to the finances of a family who is just left with P1 million to budget for their daily subsistence, education of the children, for funeral expenses, payment of loans and credits, etc. That P1 million may just easily vanish in thin air especially if the lifestyle of the family is high.

So how do you practically compute for your life insurance coverage or in other words, how much life insurance do you really need?

Let me give you a basic guideline. You must compute for the total protection needs by identifying these needs:

Immediate Needs - Before the insured dies, there are expenses which you can assume that may have to be covered like:

• Hospitalization
• Funeral/ Burial
• Mortgage/ Liabilities
• Estate Debts

Educational Needs - If you have no education fund for the children, you must include this in the insurance coverage. You may opt to include just college education fund for all your children or you can include in your estimates the high school educational expenses as well.

Replacement Income - You can compute this by the monthly contribution that you give to the family multiplied by 12 and divided by 0.08. This is the amount that they need to invest in an instrument that will give them a yield of 8% so that they can live on the interest of your insurance.

Adding all the values computed from above will give you the total protection needs that will be equivalent to the face amount of your life insurance. The beauty of life insurance is that you do not need to pay this much to the life insurance company in order to get that much amount of insurance coverage. Ask your life insurance agent how much premium you need to pay for that amount of coverage and have him or her compute for term, whole life and variable universal life and see which among these you can afford for now.

You can also decrease your total protection needs by deducting your current assets which your family may be able to use, should the unexpected happen. Examples of such sources are:

• Peso cash and placement
• Dollar cash and placement
• Any existing life insurance (group or company)
• Real estate

This will decrease your required protection needs and you can just get additional life insurance based on your computed shortfall.

I strongly suggest that the one who computes for the insurance needs is the household manager which I presume would be the wife because she will have a better grasp of how much insurance protection will be needed by the family especially the children should the breadwinners meet an untimely death.