Death can be a sensitive topic for most people. However, life insurance is crucial for the financial stability of your loved ones. While we can’t predict when we may perish, we can indeed arrange financial resources for our near and dear ones with life insurance.
If you’re wondering how much insurance you need, it should be enough to cover your financial obligations after you are gone.
There are a few ways of finding out an estimated amount that should be adequate to help your family deal with your obligations.
Let us examine the different methods of figuring out the amount of life insurance you need.
The Life Insurance Rule Of Thumb
The rule of thumb is not a very comprehensive method of calculating life insurance requirements.
You are supposed to multiply your income by a number, usually 10, and that is supposed to be the amount of life insurance you need.
Some argue that you should also add a hundred thousand dollars per child for their college expenses.
Shortcomings Of The Life Insurance Rule Of Thumb
Experts have scrutinized this rule, and there seem to be a few issues that it fails to consider.
- It does not have a fixed multiplying factor. Some say that you should multiply your income with a number between 5-15, while some feel it should go as high as 17.
- It is an outdated rule for our constantly evolving economy and interest rates.
- It does not take a thorough look at your family’s requirements.
- It does not provide a coverage amount for stay-at-home parents.
- It does not take into account your pre-existing life insurance policies or savings.
The DIME Formula
One of the most popular ways of calculating the amount of life insurance you need is the DIME formula.
It focuses on four aspects that you should consider while computing your life insurance needs.
The sum of these four financial obligations is the amount of life insurance you require.
Debt & Final Expenses
It is the total of all your debts, excluding mortgage. It also includes an estimate of one’s funeral and burial expenses.
You need to figure out how many years your family would need financial support and multiply that by your annual income. Many websites advise using the number of years until your youngest child turns 28. However, children often need help for longer than that.
Include your mortgage balance in your total financial obligations to ensure that your family has a place to stay.
Your children would need the funds for college tuition, room, and other living expenses.
Shortcomings Of The DIME Method
This way of calculating life insurance needs has a few limitations.
- It doesn’t consider the unpaid contributions of a stay-at-home parent.
- Personal considerations such as dependents and affordability.
- It doesn’t account for your pre-existing life insurance and coverage savings.
- Your beneficiaries may have to face expenses that do not fall in these categories.
You must invest in an appropriate life insurance policy to safeguard the future of your family. It would be best to leave them with an adequate amount of financial resources to lead peaceful lives.
While there are many different ways of calculating the amount of life insurance you need, they all boil down to a similar conclusion. The coverage should be enough to fund your final expenses, any long-standing debts, mortgage balances, and your kids’ education.
Suppose your life insurance coverage is equal to the sum of these considerations. In that case, your dependents can utilize your existing assets for payouts, and it should be enough for your family to lead trouble-free lives.