54% of all Americans say they have some form of life insurance. While that leaves a large percentage of people uncovered, most people can agree with the importance of having life insurance.
So, what’s keeping others from getting the life insurance that would protect their loved ones when they’re gone? Many probably wonder how much life insurance do I need and don’t have any idea how to calculate it.
Life insurance provides essential security for your loved ones after you die. But it can be a challenge to know what type of life insurance to buy and, even more importantly, how much your family will need.
Read on to learn more about how to calculate your life insurance needs.
Ways to Calculate Your Life Insurance Needs
“What coverage fits your age group?” and “How much coverage will you need?” are two of the trickiest questions when it comes to life insurance.
Who can predict when they will die, what their family dynamics will be at that time, or what their financial needs will be?
Determining the right amount of coverage can feel impossible, but understanding your life stage and future goals is key to choosing the right insurance plan that meets your needs.
Insurance professionals use different methods to help people buying life insurance figure out these questions.
One common method is the ten-times-your-income formula. In this scenario, you take your current income, multiply it by 10, and that’s the amount of insurance you buy.
However, there are some issues with this formula. It doesn’t account for stay-at-home parents, whose value can’t be overlooked. It also doesn’t consider debt or future needs, like college expenses.
A variation of this formula is to multiply your income by ten and then add $100,000 for each child in the family. This accounts for future college needs but still doesn’t address other family particulars.
Finally, there’s the DIME method. The DIME method, which stands for Debt, Income, Mortgage, and Education, is more specific in accounting for your debt and mortgage.
With this method, you add up all debts (excluding your mortgage) and estimate funeral expenses. Next, consider how long you anticipate your family needing your income in the future.
The “M” in DIME has you consider how much you would need to pay off your mortgage. Finally, estimate the cost of sending each of your children to college.
Add each of these numbers for a total, and that’s your insurance needs.
Consider the Type of Insurance and the Long Term Impact
You also want to consider whether you wish to purchase term life insurance or whole life insurance.
Term insurance is good for a pre-established period of time. You pay premiums during the term. When the term expires, so does your life insurance.
Whole life insurance does not expire as long as you pay premiums. Whole life insurance also allows the money you invest into life insurance to grow over time.
Read more about the benefits of whole life insurance here.
Answering the Burning Question, How Much Life Insurance Do I Need?
Once you work past the question of how much life insurance do I need, you recognize more how important that life insurance would be to your family.
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