When the person decides that he needs life insurance cover, one of the first questions that must be answered is what amount of cover is necessary for him. It is usually hard to determine for the individual himself the sum assured that would be financially wise and because of that the help of consultants or various information sources on the Internet are and should be used. The best example is a tool called a life insurance calculator.
It is quite easy to find various life insurance calculators as it is not uncommon for insurance companies to provide the simple examples in their websites in order for the potential client to show what financial conditions can be expected when taking out an insurance policy. However, there is also a need to understand the elements of the insurance calculators and why they are important as usually there is little or no information provided about these elements.
Usually the main purpose of taking out the life insurance policy is to guarantee the financial safety of the ones around the insured person. As various financial obligations such as loans or mortgage can become a heavy financial burden, it is important to take into an account how much money will be needed to cover these debts.
Thus, life cover providers always include outstanding obligations into their assessments when they are calculating the recommended sum assured. It means that if the person has taken out mortgage and still has a debt outstanding to a credit institution equal to £100,000, these £100,000 will be included into the amount of cover that is needed and the person should choose at least this sum as amount of protection indicated in life insurance policy contract.
If your only purpose when taking out the insurance policy is to guarantee the repayment of debts then it is enough to choose £100,000 as the sum assured. However, if you want not only to protect your loved ones from debt burdens but also to provide them an additional amount of money then other things such as costs of living or future plans should also be taken out.
However, financial safety of the important people is not only an ability to pay out their financial debts but also a capability to lead an appropriate lifestyle. Thus, it is important to incorporate the costs of living into the amount of cover that should be chosen.
So, let's take an example where the person has taken out mortgage equal to £100,000. Moreover, the family costs of living are £2,500 a month and they see that it would be good if they could get the amount of money equal to 3 years of their costs of living. Furthermore, if the insured person dies the income of other family members would decrease to £1,500 a month. It can be expressed that in such case to maintain their lifestyle the family would need additional £2,500 . £1,500 = £1,000 a month. Then the amount of cover needed is calculated to be equal to £100,000 + £1,000*12*3= £130,000.
Moreover, there could be a need to cover some of the future plans for the family members. The best examples could be a necessity to provide additional money to cover funeral expenses of the person or to guarantee that the children could go to a college. In such case the amount of money needed to guarantee the capability to pay for such future expenses should also be included into the sum of cover.
Usually life insurance calculators provide only the amount of cover needed. However, it is important to remember that monthly payments for this sum assured can be too high to be afforded. Then it is usually advised to follow such sequence: firstly to cover financial obligations, then the costs of living and after that the forecasted expenses for the future plans.
However, some of the insurance calculators can also calculate monthly premiums. In such case once the needed the amount of cover is founded, the term of the insurance is chosen. The longer term the better and usually the longest term available can be up to 40 years. After the amount of cover and the duration of the life insurance is entered into a life insurance calculator the monthly premiums are calculated.