These 2 methodologies are meant to calculate how much insurance coverage is needed.
Expense analysis and replacement is a more robust methodology, but required more data and facts to perform. Whereas Income replacement methodology will be a simpler way to calculate as income is a constant and relatively stable figure.
Income replacement is further simplified by most insurance agents as below:
10 X annual income = Insurance coverage needs
Est. income $3000/month
10 X ($3000×12) = $360,000
This planning may be okay for a basic planning especially for young adult, however if you apply this to a high income profile, or even a family man with more liabilities, the coverage needs will not be accurate or of necessarily.
Expense analysis and replacement requires more facts and figures to study and calculate.
Immediate Cash at Death -ie Funeral
Monthly household expenses
Liabilities/Loans -ie housing loan, credit card, car loan, study loan
Dependents’ living expenses (years to support) -ie young children, retired parent, spouse
Sum the above with the applicable inflation rate factored in will be the estimated insurance coverage required.
Do note that this is only for Death protection calculation. Meaning critical illness, medical expenses, disabilities and accidental coverage are not included. Same methodologies can be applied to the other needs and normally a different plan will be required.
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