Wednesday, May 23, 2007

Adequate insurance

Hi Mr Tan,

Under Financial Plannign for young, it is stated "If you have dependents, you should have life insurance for 5 to 10 years of your earnings. If you earn $30,000 a year, you should have life insurance for $150,000 or more."

Why is the life insurance amount tied to earning instead of spending? For e.g. if one earns $30,000 a year but spends only $15,000 a year, does he need to have $150,000 or more insurance? What is the assumption make here? Assuming that most people spent all their income?



You are right. The amount of life insurance should be tied to spending. But, for most people, the spending is quite closely related to the earnings.

Some people, however, think that it is the loss of earnings that should be insured. So, both formulas are about right.

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