Let’s assume you want to buy life insurance now which covers death. The question is, how much coverage do you really need?
When buying life insurance, you have to take note that you are insuring yourself for what you are worth for. How much is your life worth?
Imagine you buy a car worth PHP 1M pesos, you are also required to buy insurance worth PHP 1M to cover the cost of the car. Same goes if you want to buy a condo worth PHP 3M, you are also required to get an insurance worth PHP 3M to cover the cost of the property. But what about your personal insurance, did you insure your self for how much you are worth for?
There are different ways to analyze the recommended life coverage. Here’s some example to guide you in computing your coverage.
Example: JUAN DELA CRUZ, 30YRS old earning PHP 50K monthly with PHP 40K monthly expenses. He has a 1 year old son and a full time wife.
BASE ON BENEFICIARY EXPENSES. Using this method, we will compute the amount needed for the beneficiary till they become independent and have their own income. Assuming that we need to support our kids till age 23, Juan Dela Cruz needs 23 – 1 yr (son) = 22 years of support.
Coverage = PHP 40K (monthly expenses) x 12 (annualised) x 22 years = PHP 10.56M
In case something happen to Juan dela Cruz, his beneficiary will survive for the next 22 years not worrying about their expenses.
BASE ON INCOME REPLACEMENT. Using this method, we will compute all the future earnings up to specific period of time. It can be up to retirement or up till the youngest beneficiary become independent and have their own income.
Coverage = PHP 50K (monthly income) x 12 (annualised) x 22 years = PHP 13.2M
In case something happen to Juan dela Cruz, his beneficiary will survive for the next 22 years using his future income.
BASE ON COMPLEX COMPUTATION. This is the most complicated way to determine your life worth as this involves several factors. These includes future expenses, inflation, cost of living, etc. In order to do this, you need to list down all possible future expenses and corresponding inflation in the future. Education for example, cost of elementary, high school and college varies and needs to be considered on the future expenses. Unlike with the previous 2 method where we straightforward compute the basic and current expenses. Even for the monthly expenses, you need to consider the yearly inflation and increase the yearly expenses accordingly to cope with the rising costs in future.
Whatever method you choose, this only gives you guide on rough estimate how much coverage you need to get on your insurance policy. The price may be high and you might end up getting a lower coverage than what you need. But that’s OK, as long as you understand it. It’s a long term commitment and no point in getting a huge coverage which you cannot sustain the premium. In future once your finances improves, you can still get another insurance to cover the shortfall.
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