It Is A Rule Of Thumb That With This Type Of Insurance You Generally Take Out 10 Times The Amount Needed Annually

Category: Finance.

A question that any person concerned about sound financial planning should always ask themselves, but how do you work out the answer?

So in other words if you die and someone needs money as a result, you will need to sort out some sort of insurance. The first question that you need to ask yourself in order to answer the above is" If I die will I leave someone worse off financially? " In the question" will anyone" that refers to not only family dependents but can also mean lenders or business partners, just about anyone really. So before we look at family protection lets deal with the most common need for life insurance and that is to cover a lending institution such as a mortgage company. So if you have a debt of say 120k for 25 years, the insurance that you would arrange based on the questions above would be term insurance for 25 years with a sum assured of 120k therefore ensuring that if you died, during the 25 year term of the debt, there would be a lump sum sufficient to repay the lender in full. When you take out a loan on a property such as a mortgage the lender invariably wants you to insure the debt in the event that you die. Now family protection, this is probably the second most common type of protection but in my opinion by far the most important. Well, because it is for the benefit of your love ones.

Why? What is the point of working to build up a lifestyle for you and your loved ones, for them to only lose it in the event that you were to die? To do it you need to work out what would be the financial impact of the life assured not being around. Actually putting a figure on what is needed for family protection is somewhat more difficult than the mortgage life insurance. The best way to do this is looking at the salary that the person brings into the house. So if you earn 20k per annum then you would need some sort of life insurance plan that would pay out a sum equal or greater than 20kpa to be of any benefit.

On the basis that most if not all people live to their means it would be fair to say that the financial impact of them dying would be the whole and total loss of their salary. If you could not find a plan that would generate an annual or monthly income amount you would need to consider taking out life insurance for a fixed lump sum of money. So in this particular case you would be well advised to consider taking a plan for 200, 000k. It is a rule of thumb that with this type of insurance you generally take out 10 times the amount needed annually. The purpose of this would mean that in the event of your death the money could be invested to generate an income of 20k well into the future. To bring all this together you only need life insurance if someone is financially worse off in the event of your death and the amount needed for that life insurance is the amount of financial impact created as a result of that death.

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