Life insurance policies can be very helpful for a number of reasons. The main reason most people get a policy is because, if you pass away and are the primary source of their income, it could be a chaos for them.
But with a life insurance policy, you may be able to prevent this. That is because it pays out the monetary value of the policy to the late policyholder’s beneficiaries in case he/she passes away.
When considering getting a policy, one of the big questions you need to answer is this one… how much life insurance should you have?
We’re assuming this is a question YOU have because you’re reading an article with that very question as the subject line! So, let’s get straight to the answer.
How Much Life Insurance Should You Have
To tell you the truth, this is a hard question to answer. There are many factors that will affect how much life insurance coverage you should have.
One of the big factors is how much are your financial obligations. It may also include your current personal situation. For example, is your family relying on your income to support themselves or is your spouse the primary breadwinner in the family?
But here are some ways you can calculate how much life insurance coverage you need. Our first suggestion is for you to estimate your financial obligations.
We suggest adding up the items on the list below get an idea of what your total financial obligations are. They include:
- Salary per year multiplied by years you want to replace the annual income
- The balance of your mortgage
- Your debts
- Funeral costs
- College/school fees (if you have school age kids)
- The cost of services to replace what a stay-at-home parent provides
After getting the sum of your financial obligations, the next thing to do is subtract the following from that total:
- Savings
- Current school/college funds
- Current life insurance policies
If You Don’t Like Math
If you don’t want to go through all that, there’s an easier formula that experts recommend. Here, you just multiply your current income by 10 or 15.
This method takes into account the following:
- Inflation
- Market returns
- Your household expenses
If you use this method, many experts also believe that you should kick in at least another $10,000 to $100,000 per child for college fees.
Okay, so there is math involved here. It’s just not as complex or time consuming as the first method we share.
The DIME Method For Figuring Out Life Insurance
Another method to calculate how much life insurance you need is through the DIME method.
DIME stands for Debt, Income, Mortgage, and Education. Like the name suggests, this takes a look at your current financial situation, making it more accurate than the previous method.
To get the amount of life insurance, you need to get the sum of all four. To get the debts, simply add up how much you owe.
As for income, you need to estimate how many years your family would need your support. Then once you do, multiply that number by your annual income.
To know your mortgage, simply get the amount you need to pay off your mortgage. For education, estimate the possible cost of your child/children’s education.
Once you have a total, that gives you a good idea of how much life insurance you should have.