How Much Protection Do You Need?

As I mentioned in one of my earlier posts (http://financialhealthblog.blogspot.com/2009/05/life-protection.html), Life Insurance is something that almost every family, if not every family, needs. In the earlier post I also described the 2 main types of insurance coverages (Term and Permanent). Now that you're educated about the types of insurance, you need to determine HOW MUCH coverage you need.

There are several different ways to come to this number, but I will show the method that I use, as a general 'rule of thumb' when calculating how much protection a person/family needs. The method that I use is called the "DIME Method". This stands for:

Debt (combined credit cards, loans, lines of credit etc...)
Income (Income replacement for x number of years -- usually around 10 year, or until the youngest child turns 18 for those who have kids)
Mortgage (Mortgage balance)
Expenses (Can be things like education for kids [in this example, Assuming 4 years per child @ $15,000 per year], funeral expenses, taxes, leaving money for charity, etc...)

Remember, this is a general calculation which should give you a 'ballpark' figure of approximately how much protection you will need; sometimes there are other circumstances that will increase/decrease the amount of protection needed.

Let's use an example.

Debt: $50,000
Income: $400,000 ($40,000 annual income multiplied by 10)
Mortgage: $250,000
Expenses: $150,000 [$120,000 (2 kids each attending for 4 years @ $15,000 per year) + $20,000 Funeral Expenses + $10,000 Taxes]

Total: $50,000 + $400,000 + $250,000 + $150,000 = $850,000

For the above example, this is the amount that will PROPERLY protect the family in the unseen case that the breadwinner passes away.

If the client, for example, already had some insurance put into place, then you would subtract that amount from the amount remaining. Lets assume that the client was sold a Permanent Insurance policy several years ago for $250,000; this would mean that remaining coverage needed is $600,000.

Now comes the point of choosing which type of insurance the client should take; Term or Permanent (or a combination of both)? This is something that needs to be discussed with your advisor. Every family situation is different and needs to be assessed individually.

A couple of things to remember:
- Insurance is a privilege, not a right, so you must qualify for it.
- YOU are your most important asset; your ability to generate an income

This post was mainly intended to give you a general calculation for how much insurance coverage you might need. Of course, everybody has a their own situation and the above example might not fit them properly, so it is always best to sit down with a well-informed advisor to go through the numbers that are right for you.

If you require more information, please do not hesitate to contact me. I hope you've learned something!