How much insurance do you need?

One of the best ways of winning is by losing less. The same applies to your financial wealth. If you want to be a successful investor you need to be a good risk manager and protect your downside risk. Taking proper insurance does the same for you. It helps you prevent damage to your wealth due to unforeseen events that may rob you with your life savings. But who should carry insurance and what types of insurance and more importantly how to decide on how much insurance you need.

The most important type of insurance is life insurance. The reason for carrying a life insurance is to provide financial support to your dependents, who will be left high and dry in case of your untimely death. If you are financially independent and even your dependents are financially independent you might not need a life insurance.

Once you have decided you need life insurance, the best thing to do is buy a term insurance. You might be suggested otherwise by your insurance agent, however, term insurance is the cheapest way to get insured that will serve your purpose.

Now the next question is, how much insurance is required? Here is a simplistic way to calculate the amount of insurance needed.

Step 1 Shortfall in the annual income that will be needed by the survivor(s)
Step 2 The amount calculated above should be multiplied by the number of years income needed
Step 3 The insurance needed will depend upon amount calculated in step 2 less total assets available with you.

The term insurance should be purchased at a fixed rate and should be bought for the longest time you can afford and need. Moreover, make sure that the policy is renewable and you are able to purchase future coverage regardless of your health.