So you’ve made the decision to purchase life insurance coverage. Great decision! If you haven’t bought life insurance before, or you haven’t discussed policies with an agent yet, you might be feeling overwhelmed. When looking at a life insurance policy and reading about a hypothetical large amount of money that will only be paid out after your death, it can be difficult to put that into terms that are relevant to you today.
There are a number of ways to determine how much life insurance coverage you’ll need. Before buying your policy, it’s always best to speak with an agent who can help you to come up with a personalized plan. But before you meet with your agent, these methods can help you to narrow down your search.
Evaluating Your Insurance Needs
Let’s start with one important distinction: everyone needs insurance. While wealthy people or people who are unmarried with no dependents may feel that there are no benefits to life insurance, life insurance is not just a vehicle to provide a legacy for dependents. You can use it to pay estate taxes, donate to a charity, or save for retirement.
Instead of thinking about life insurance as its own separate financial decision, integrate it into your overall financial planning. Your life insurance needs will change as you grow older and develop and create your household financial plan and budget, your policy will need to reflect this.
As you think about how much life insurance coverage you need, start by answering the following questions:
- When I pass away, how much money will my dependents need to meet the immediate obligations? These, also known as “final expenses”, include costs like estate settling, funeral costs, outstanding debts, and mortgage balances.
- How much money will my dependents need in the future in order to replace my income and sustain the household?
- If I were to pass away, would my spouse need to start working after my death?
Life Insurance Formulas
Some people like to use formulas to calculate just how much coverage would be right for them.
One of the most popular formulas has been multiplying your annual income by 10. Some wealthier people may choose to use a lower multiple, such as 5 or 7. However, in recent years, experts have found this calculation method to be incomplete and outdated. It does not consider individual needs and would not work for younger households with a stay-at-home parent.
An updated version of this formula suggests 10 times your annual income, along with $100,000 per child. The extra money per child will provide for education expenses. However, this method still does not consider more specific needs or existing assets.
Another method is called the DIME formula. This refers to the four main costs that you should calculate for your life insurance coverage.
- Debt and final expenses – These are the immediate costs upon death: debts (excluding mortgage), funeral and burial costs.
- Income – This determines how much income replacement is needed. Think about how many years your family would need the income and multiply your current income by that number. Typically, people choose to include calculation of this income until their youngest child turns 18 or graduates from high school.
- Mortgage – This refers to the amount of money that is needed to pay off the mortgage.
- Education – This is the cost of sending kids to college.
If you have savings, an existing life insurance policy, college funds already in place, or other assets, you can subtract them from the numbers that you have calculated.
We hope that these formulas and methods have given you a good start on determining how much life insurance coverage you will need to fully protect your loved ones and leave a lasting legacy. If you have any other questions about life insurance coverage, don’t hesitate to call an agent, who will be able to provide you with more information about your individual situation.
About National Catholic Society of Foresters
At National Catholic Society of Foresters, we pride ourselves on giving back to the communities that we serve by providing quality and comprehensive insurance solutions. Sales from our financial services products help fund member benefits along with social, educational, and volunteer programs designed to respond to community needs. Our portfolio is extensive, ranging from various life insurance policies to IRA’s to support your financial needs no matter what stage of life you’re in. For more information, contact our friendly experts today at (855) 804-7424.