When considering life insurance, youre planning and preparing for an event most of us would rather not think about. But life insurance represents a critical step in managing your personal finances and ensuring your familys well-being.
The Two Approaches to Life Insurance
You can use one of two approaches to estimate how much life insurance you should buy: the needs approach or the replacement-income approach. Using the needs approach, you calculate the amount of life insurance necessary to cover your familys financial needs if you die. Using the replacement-income approach, you calculate the amount of life insurance you need to equal the income your family will lose. Lets look briefly at each approach.
You need how much?
Using the needs approach, you add up the amounts that represent all the needs your family will have after your death, including funeral and burial costs, uninsured medical expenses, and estate taxes. However, your family depends on you to pay for other needs, such as your childs college tuition, business or personal debts, and food and housing expenses over time.
The needs approach is somewhat limiting. The task...
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