What is Life Insurance?
Life insurance could be one of the most important financial decisions an individual could take in their life. After some one dies, it is entirely possible that someone could suffer financially. This includes spouses, children, aging parents or even business partners and employees. So to put it simply, life insurance is an agreement and a contract between a person and their insurer (who helps them process the life insurance) where the insurer will pay a sum of money to a specific person upon the death of the individual. Experts have a rule of thumb, where they recommend an individual buys life insurance from 5 times to as high as 20 times their annual income. However, life insurance is an extremely important asset to have, so people should not follow the rule of thumb blindly.
Instead, a smarter approach would be to contact an insurance agent who performs a “financial needs analysis”. A financial needs analysis calculates every financial aspect in your life, ranging from family expenses, spouse’s salary, the number of children in the household and existing life insurance plans. Debts are also accumulated in the balance sheet that is being created, such as mortgages, loans and outstanding medical expenses. Then, the insurer takes into account the expenses that need coverage after you have died. These include funeral expenses, covering all the underlying debts due, credit card bills. These debts that are to be paid off after the death of a person are known as immediate expenses. There is a second type of expense known as ongoing expenses. These are expenses that are payable to an individual’s family for short term survival needs. These include food, clothing, utilities, healthcare and housing. The third and final type of expense is known as “future expenses”. These are expenses include future college tuition fees and retirement fees for one’s spouse. The difference between your family’s need and the resources that your family already has is equal to the amount of life insurance an individual would need.