Owning a life insurance policy protects your immediate family and enables you to leave them a non-taxable amount in the event of your death. It’s also essential in covering your mortgage and individual loans, including car loans. For this reason, you should know more about the types of life insurance.
The importance of life insurance cannot be overstated. However, the major question to ask is how much life insurance should you carry? It may be difficult to know the exact amount of life insurance you should get, but you can make an estimate based on your present financial state and what your family may need in the future.
Rules of Thumb to Answer “How Much Life Insurance Should You Carry?”
If you want to estimate how much life insurance you need, you may need to apply certain rules and review tips for buying life insurance. Using the rules will help you get a better idea of how much insurance you need, instead of having a random estimation. Here are the rules to note:
Multiply Income by Ten
Multiplying one’s income by ten is a very significant rule, but it may be quite outdated considering the present economy and interest rates, says Marvin Feldman (Ex-President of Insurance Industry Group Life Happens)
The reason why the ten-times rule may have some issues is that it doesn’t properly analyze the needs of the family or savings and existing life insurance policies. Another significant problem with the policy is that it doesn’t cover the full-time parent, who should have coverage even when they don’t earn any income.
Include $100,000 Per Child for College Expenses
If you have children, education expenses are especially important aspects of your life insurance estimation. With this formula, you are including another necessary layer to the previous rule of thumb. However, it doesn’t take a deep look into the family’s needs, assets, or current life insurance coverage.
The DIME Formula
The dime formula is a more analytical rule that encourages a more detailed look into finances compared to other previous ones, which will help you appropriately answer the question of how much insurance you should carry. The full meaning of “DIME” is debt, income, mortgage, and education, which are important factors to consider in life insurance.
For debts, you need to add them up along with an estimate of your funeral expenses; ensure that this excludes your mortgage. For income, you need to estimate the number of years that your family will need financial support and multiply that by your annual income. The mortgage aspect is straightforward. You need to calculate the amount that you need to pay them off. Finally, education describes the estimate of the cost of sending kids to school and college. Adding these four aspects will help in giving an estimate of the needs for life insurance.
In the calculation of your life insurance estimates, you need to consider the purchase as part of a total financial plan. The plan should cover future expenses, like the cost of college and the futuristic growth of income or assets. You may also consider buying multiple, smaller life insurance policies instead of one larger policy to help in varying the coverage as needs change.
Contact the team at Northeastern Group Ltd to get started on the best premium for your life insurance coverage. Serving New York and beyond, we are here for you during this challenging time.
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