Life insurance policies can help provide a sizable payout to your beneficiaries after your passing. Apart from providing financial support to your beneficiaries, some life insurance policies can also be used for other purposes, such as accumulating cash value.
To make a good estimate of how much life insurance you need, there are factors you need to consider. Your financial obligations, assets, and income are examples of things to consider when buying life insurance.
Things to Consider
The first thing to do is to ensure you view life insurance as part of your financial plan. When calculating how much coverage you need, consider your future expenses such as college education costs, and a possible increase in your income. Also, ensure you create a balance between your future expenses and your income.
While your income will possibly increase over time, so will your expenses. This should be reflected in calculating how much insurance you need. Another thing to consider is the possible expenses of your beneficiaries, which is typically your spouse, children, etc. Since the major aim of life insurance is to provide financial support to your dependents, you should make an estimate of how much your family or dependents will need in case you are no longer around.
How to Calculate How Much Life Insurance You Need
To have a quick estimate of how much life insurance you need, there are different methods to use.
The first method is to multiply your income by 10. However, this method does not provide a detailed consideration of your family’s needs and does not consider your savings or current life insurance policy. It also doesn’t account for stay-at-home parents who may not have an income.
The second method involves multiplying your income by 10, plus $100,000 for college expenses for each child. This method includes additional coverage for education costs for your children. However, it doesn’t include a deep analysis of your assets, other needs, or any other insurance coverage in place.
The third option involves a more detailed look than the first two. It uses the DIME formula to account for certain areas when calculating how much life insurance you need. “D” stands for existing debt and final expenses. “I” stands for annual income. This means multiplying your annual income by the number of years your family would need financial support from you. “M” stands for the remaining mortgage balance. “E” stands for future education expenses.
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For more information about how much life insurance you will need, reach out to Innovative Senior Benefits today. We can help find you a policy that meets your needs!