A reasonable way to approach life insurance is to think of it as an asset rather than a necessary expenditure. In fact, life insurance is akin to investment in property. Some of the advantages of buying life insurance are listed below:
- It is a very secure asset
- The policy owner need not worry about closely managing it
- It is purchasable in any affordable amount
- It provides a reasonable rate of return
- Proceeds are payable immediately
- The policy owner can choose his/her method of premium payment
Read more: What Is A Life Insurance Policy?
Estimating Life Insurance Need
There are several simple methods used to estimate an applicant’s life insurance need. Next we will review these methods along with examples.
The most basic rule of thumb is the Income Rule, which states that the insured’s insurance need would be equal to 6 or 8 times his/her gross annual income.
Example: Allie is earning a gross annual income of $60,000. She should have between $360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.
The Income Plus Expenses Rule states that the insured’s insurance needs to be equal to 5 times his/her gross annual income plus the total of any mortgage, personal debt, final expenses, and special funding needs (i.e., college, university etc.).
Example: Assume that Fredrick earns a gross annual income of $60,000 and has expenses that total $160,000. His insurance need would be equal to $460,000 ($60,000 x 5 + $160,000).