How much Insurance do I need?
Blog Post 1: How much Life Insurance do I need?
Hi! Hope you are having a great day. Today I would like to share some helpful insights about how much Life Insurance you need. Life insurance is important and you should consider having one not for our benefit but for our loved ones as well. And even though we can’t predict when our time is up, we can control how much of a life insurance payout our loved ones will get when we are gone. What better way is there to save your family from those financial worries?
So how much Life Insurance do I need?
Most experts would recommend getting a coverage that is equal to 10-12 times your annual income. And you can make it a Term Insurance Policy that lasts for 15-20 years. Sounds reasonable right? Why 10-12 times your annual income? Because it replaces your salary if you die and gives your family a financial cushion to help them get back on their feet. It gives them some funds to invest, where the interest coming in every year could provide vital income in your absence.
The DIME Formula
A sharp accountant has come up with what’s called the “DIME” method. DIME is an acronym for Debt, Income, Mortgage and Education. This formula has been proven and tested. And you can use the DIME formula as a starting point in calculating your life insurance needs.
D = Debt
If you were to die tomorrow, how much debt would you leave behind? If you’re not independently wealthy and haven’t prepared with life insurance, all of that debt gets passed on to your family. So your life insurance policy should cover any debt. You’ll also want to include funeral expenses in that debt figure. For example, let’s say you have $20,000 in credit card debt and $20,000 in student loans, and you’re budgeting $10,000 for your funeral. Your total debt is $50,000.
I = Income.
Your life insurance policy needs to provide a sufficient income for your family to maintain its standard of living until the youngest child turns 18. In this example, let’s assume that your youngest child will graduate in 10 years; so we’ll multiply your annual income by 10. For example, if you make $55,000 per year, you might consider a $550,000 policy.
M = Mortgage
If you’re still paying on a mortgage, your life insurance policy should pay off the remaining balance of your mortgage loan. So, if you still owe $100,000 on your home, for example, add that figure to your debt and your income.
E = Education
If you have children, do you plan to send them to college? If so, you should budget a minimum of $100,000 per child for a four-year university education at a state school. That includes tuition fees, room and board and books. If you’re thinking of a private university or out-of-state school, get ready to pay a lot more. Financial aid and student loans help, but there’s no guarantee of getting scholarships, and loans can come with high interest rates.
So, let’s take the figures above and consider that you have two children you plan to send to college. Here’s how it adds up:
Debt: $50,000
Income: $550,000
Mortgage: $100,000
Education: $200,000
DIME = $900,000
According to the DIME formula, your recommended life insurance coverage is $900,000. Of course, each person’s needs are different, so just consider this a baseline analysis and customize your coverage amount as needed. Remember, some insurance is better than none at all.
Death may be the last thing that we can think about, but we can all agree about the importance of planning for the future of our loved ones. Life insurance gives peace of mind and assurance, for you and everyone who depends on you. Beyond providing financial security, life insurance can also be used as a tool to fund college tuition or retirement.
We believe a term life insurance plan makes the most sense for everyone and if you need more information about this feel free to contact us.
Hope this article helps.
Thank you for reading and have a great day!