Life insurance induces negative thoughts and emotions in a number of people's minds. Such people may have had terrible experiences with greedy sales representatives or perhaps do not understand the concept. Life insurance is really a useful social and economic tool that ensures that the unfortunate few can be supported by the fortunate many. Sometimes even those with misgivings about life insurance spend too much on it. The reason is that they always look to receive returns from the plan while they are alive. That seems reasonable, but if life insurance is purchased without reference to other elements of the financial pyramid, the investment would not possess the value that it should have.
Life insurance needs are calculated using three main variables; final expenses, the first year shortfall and the income replacement fund. Final expenses include all the bills that must be paid immediately upon the death of a person. These include doctor's bills, estate fees and creditors.
The first year shortfall denotes the drop in household income that occurs within the first year of the insured's death. The income replacement fund is an accumulated fund that substitutes the income earned by the insured. It embodies the principle of money working for you. Suppose you earn $8,000.00 per month. If you received $1,000,000.00 working at an interest rate of 8%, you'd receive your previous income as interest. That is the principle behind the income replacement fund. If you have coverage in place already, the coverage available is subtracted from the coverage needed. The calculation is represented in the following equation:
Life insurance need = (Final expenses + First year shortfall + Income Replacement Fund)- Coverage available.
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