How much life insurance coverage do I need?
While there is no decisive answer regarding how much life insurance you need, there are some general rules you should keep in mind when choosing your death benefit. Here are some things to consider regarding your life insurance coverage.
Calculate Your Financial Obligations and Assets
Your ideal life insurance coverage amount will be the difference between your long-term financial obligations and your assets. However, it can be difficult to get a clear idea of both your obligations and your assets. This is why the following general rules exist.
- Rule 1: 10 Times Your Income and $100,000 Per Child
This first rule suggests that you secure a life insurance benefit that is ten times your current income, and an additional $100,000 for each of your children. Keep in mind that this is a very general rule that does not take into account your savings. Additionally, this rule can be difficult to follow as a stay-at-home parent. These parents are encouraged to secure enough coverage to pay for the services that they provide on a daily basis, such as childcare services, housekeeping, and the like.
The second part of this rule is to secure $100,000 for each of your children. This amount is meant to provide for child-rearing costs and plan for future educational expenses. Again, this rule is not absolute, as it is an extremely vague guideline that does not account for your family’s specific needs or the college and other savings accounts you already have in place.
- Rule 2: The DIME Formula
The DIME formula asks you to take a more detailed look at your finances when determining life insurance coverage amounts. The acronym DIME stands for debt, income, mortgage, and education which are the main areas that you need to consider when choosing your death benefit.
- Debt: Add up the cost of your debts, other than your home mortgage. This will include things like student loans and credit card debt. You should also add an estimate of your funeral and burial costs to this amount.
- Income: Decide how many years your family will need financial help and multiply your current income by that number.
- Mortgage: Determine how much money you will need to pay off your mortgage.
- Education: Do your best to determine how expensive it will be to send each of your children off to a four-year university.
Once you have each of these totals, you add them up, and the subsequent sum is the minimum amount of life insurance coverage that you should secure.
It’s important to remember that both of these rules are very general and will not give you the most accurate estimates. The best way to properly calculate your life insurance coverage amounts is by speaking to a financial advisor and an experienced life insurance agent. For assistance with your life insurance needs, contact the experts at Pierce Insurance Group to get started today.