A life insurance policy is something everyone needs when planning their financial goals, but everybody requires different life insurance coverage. How much life insurance you need depends upon your financial situation, commitments, family, and the number of dependents on your income.
When creating financial protection, you need to keep these factors in mind because these will determine the life financial resources your family would have. The life insurance coverage for an average insured person should be at least 10 to 15 times his annual income, excluding existing assets.
In other words, your life insurance coverage must be enough for your monthly income replacement and cover your family’s financial obligations. These include the rent, mortgage, funeral costs, bills, college tuition, car loans, and many other expenses.
Estimating how much term life insurance I need can be difficult to understand. But that’s not a problem; we’ve got you covered. Let’s see what your life insurance policy entails for any family situation.
What Is Life Insurance?
Life insurance is a monetary contract signed between an insured (you) and the insurer (insurance company). It works by guaranteeing a safe amount of money to your beneficiaries. To compensate for that, you pay life insurance premiums to the company. The insurance money is passed on to your dependents upon your demise, which is why it is also termed the death benefit.
It covers your financial losses like your funeral expenses, final expenses, mortgage balance, outstanding loans, and living expenses to maintain the standard of life of your loved ones. In effect, it is an assurance that the rights of your dependents will be safe up to the life insurance policy upon your untimely death.
Life insurance typically comes in two ways, i.e., whole life insurance coverage and term life insurance coverage. Whole life insurance policies are also referred to as permanent life insurance coverage as they cover your whole life if the premiums are credited. It is relatively better than term life insurance and is recommended by financial experts.
Some life insurance companies also offer an investment component. It lets you invest the premiums paid into other businesses and build cash value upon it. For some policyholders, the tax benefit can be a great investment. But if you plan on using your life insurance as an investment tool, you should consult a certified financial planner to help you strategize your investment opportunities.
Term life insurance policy offers life insurance for a specific period, and some also offer renewal of the life insurance after the expiry. Depending on your gross income, age, and period of life insurance, you can buy a life insurance policy of 30 or 40 years and change it later.
However, unlike term life insurance, permanent life insurance charges higher premiums and offers better options. A couple of other companies offer renewal services, too, but that is based on a medical exam that is a must to pass. Since not everybody is up for such tasks, it is a less adopted method.
Do I Need Life Insurance Coverage?
Most people with meager annual incomes can benefit from life insurance coverage. If your job is the primary source of income in your household and your loved ones depend upon you, then buying life insurance can be useful for you.
However, even if you are single and have no family, you can still apply for life insurance. You can easily secure life insurance at a lower payment than usual if you are young and healthy.
Your age can play a big role, if not huge, in confirming your life insurance. One of the greatest myths of all time is that insurance companies are not that keen on signing up for life insurance policies with older people. It is followed by the idea that getting a policy becomes difficult with each passing day of your life.
The premiums for life insurance are lower when you are young, but that does not guarantee you secure the policy. The companies may charge older people higher premiums for the services, but no company would turn down a money offer. They care about the cash and not where it’s coming from.
But how do you know what life insurance will be sufficient for you? Let’s say your annual income is $200,000, and you decide that $1000,000 would be enough life insurance cover for your family. In reality, this amount would only cover your family’s financial needs for five years, excluding additional expenditures including debts and home mortgage payments, and they have a whole life ahead.
The right insurance is where the finances of your children, spouse, and aging parents are safe years down the line, and their life insurance needs are never compromised. So, how much life insurance coverage do you need to guarantee financial support to your family? Let’s see.
How Much Life Insurance Coverage Do I Need?
Before we get into how you can calculate life insurance, consider these factors:
- Age
- Family members
- Ages of your children and spouse
- Aging parents (if any)
- Mortgages or debts
- College expenses of each child
- Your current income
- Final expenses
That being said, how can you calculate the amount you need as life insurance? There are several methods you can use for this purpose, some of which are as below.
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Manual Life Insurance Calculator
You can find the insurance amount you can get by using a calculator. Like other calculators, it requires an equation, and any values that go in that equation are solved by the calculator. We have penned down the equation of how much life insurance you need below:
[Financial needs you need to deal with] – [existing assets you have with you] = Your life insurance.
Finances that you need to deal with include:
- Mortgage: To pay off the mortgage or rent of the house you live in.
- Income replacement: The regular monthly salary you used to provide for your family.
- Tuition Fee: Your child’s college fees must be paid now or in the future.
- Debts: Any debts your family would have to deal with after you’re gone and the cost and help of a stay-at-home parent.
Existing assets could include:
- Funeral Expenses: If you already have some money at hand to cover a funeral, it would be counted as an existing asset. So, take this into account when deriving how much coverage and cash value your plan offers.
- Savings: Any saved money you might have at the house that your loved ones could use to pay loans or expenses must be subtracted from the life insurance. However, if you want your loved ones to use that amount later in some other way, you can choose to omit it.
- College Dues: If you have saved up money in any account for your child’s college expenditure, you can minus it from the life insurance.
- Existing Life Insurance: If you have any existing life insurance to deal with your financial obligations, you will have to subtract that amount too.
After all this process, the final amount you get is your life insurance coverage. You can add a bit more in case of any inflation changes or changes in price, etc. These financial decisions require time and good knowledge of all active and passive incomes, and you should always keep a backup for all situations.
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Using Online Service To Calculate The Life Insurance
As the title shows, many online services automatically calculate your estimated life insurance coverage upon providing the details. This method is relatively easy because the software does all the calculation and sorting, and you just have to input data.
These calculators include life insurance, debt, services replacement, and a separate debt calculator. It lets you know how much you will need to take out to settle any debts that are due and your annual salary. And your family costs up till the youngest child.
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Multiply Your Salary By 15
This method is more of a thumb rule and has been used for decades for many reasons; it is not the best approach to estimating your life insurance. Multiply your annual income by 15 or 20 or as many times as you think would suffice your family. If you are young, you might want to add more years and plan a little differently if your earnings per year change and the annual salary goes up by a number or two.
It is an estimate based on the income you earn per year and the number of years you think your family will need life insurance or until your children come of age. In this method, then add $100,00 to the add-up for each one of your child’s college education expenses.
However, this method is unsuitable because it does not consider all the factors you need to take care of. It does not look at the extra money in your account, nor does it take into account any existing insurance policies. It doesn’t count the stay-at-home parents whose services cause the home to be at peace, and their untimely death would leave you nowhere.
Even if the stay-at-home parent has no active income, the value of their work must be added to the life insurance. So if the parent encounters a sudden death in the future, you have enough funds to hire someone that could provide the same services. A prime example of this is child care, which was initially free of cost at your home.
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The DIME Formula
The DIME method is one of the most comprehensive techniques to measure life insurance. It takes a detailed look into your life and the aspects that require attention. It stands for Debts, Income Replacement, Mortgage Payment, and Educational Funds.
Let’s see what death benefit this method entails and what it has to offer to us,
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Debts Or Final Expenses
Besides securing your family’s future expenses, life insurance is also used for paying off final expenses, debts, car loans, credit card debt, and student loans. Or any other due debt that your family won’t be able to pay after your demise. If you have any debts, you must acquire enough insurance to pay them off.
These include all the debts that aren’t forgiven upon death and must be paid. Make enough estimates of all the debts you owe people, including everything, credit card, car loan, student loan, and even personal loans between you and your family.
That means if you have a debt of $5,000, you need to have at least $6,000 as your life insurance. This is the least amount, and the tax and interest haven’t been added yet.
To save your family from any more coverage, you must try buying life insurance that is a little extra. This also includes the expenditure on the funeral and other trivial matters that need to be taken care of.
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Income Replacement
For income, you need to gather all your data and think about how long your family would need financial support before they become able to earn themselves. The usual time limit for children is when they reach 18 years of age; they are expected to start earning and bear their expenses themselves.
An easy method to figure out is to check when your youngest child graduates college. Then with the sought-out period, multiply your income per annum and keep the total amount a little higher. If you are the only breadwinner, you must take all sorts of preventive measures to replace your income and protect your family from inflation.
However, if none of this seems to work, you can just call an online insurance estimator, who will guide you regarding your financial planning and the right amount of life insurance.
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Mortgage Payment
Check and determine that the remaining payoff amount on your mortgage includes the tax and interest. Then multiply it by the number of years it will take your family to pay back the mortgage. Add that amount to your insurance and raise the stakes because real estate changes swiftly. And you don’t want circumstantial events to make your family’s life difficult.
Say you have a mortgage balance of $300,000 remaining; you should get life insurance of $303,000 to cover the future expenses. This insurance is usually permanent, and many prefer it over term life.
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Educational Fund
Just like other financial obligations, paying college tuition fees is yet another burden. You need to check online or with your child’s college and add in the amount required to cover the college costs. As per a rough estimate, the total value revolves around $100,00 or slightly more per child.
Put together all these factors, subtract any savings or existing insurance policies and extract the lump sum. The acquired amount will be your life insurance. But once you extract that number, you might want to make it go up in case of a parent’s death.
This way, even if a bad event occurs to you and your spouse, your children and your dependencies will have a safe and secure income into the future.
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Bring In The 1% Income Formula
For those who are very budget conscious, an easy way to choose insurance coverage is an amount that equals 1% of your total income. This way, even if you are in your worst conditions and have no extra money to spare, you can still pay the company’s premiums.
Experts and financial advisors also recommend using a payment that you can fit into your monthly earnings. In life insurance needs, affordability should be the key point.
Factors to Consider Regarding How Much Life Insurance Do You Need?
Before determining the amount you’ll need for insurance coverage, look at these key factors.
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Consider Life Insurance As Your Financial Planning
To get things straight, you need to think that you are planning out your future finances and how your family will deal with them when you are no longer there.
It must accommodate all sorts of expenses, and family situations, replace services and increase your salary in the future. All these will be insured if you continue paying premiums to the insurance company on time.
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Discuss It With Your Family
Although a very emotional task, you must ask your family, especially your spouse, what amount would be the best. Ask your spouse how much insurance they would need before becoming financially stable. Do they think your idea sounds good? Or will they need insurance to replace the entire income, or would a little bit of it do?
This simple conversation can save you in many places and from many problems. You will have a clear image ahead and know how to work your way through it.
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Create Protection
You do not know the rise your gross income will see in the years or your expenses. So while you can’t figure out the future, you can set up a protection system for your family to allow them to live their good lives. Sign up for the insurance you need after cushioning the impacts.
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Avoid Sticking To One Huge Policy
Although somewhat useful, it is better to avoid using one big policy only. Instead, you should apply for several short-period insurances as they can better cover your increasing flows and ebbs.
For instance, you should opt for various policies instead of buying insurance and adding additional life insurance. You can insure your spouse with a 40-year policy up till your death, etc. And a separate 25-year policy for your children to clear college.
FAQs About How Much Life Insurance Is Required?
1. What Is The Minimum Insurance You Should Have?
Your minimum insurance depends upon the amount that would keep the lives of your children and family going. In the case of burial policies, the minimum amount people get is $5,000, which is also for the funeral, not the beneficiaries.
Insurers, however, try to take the amount up to at least $50,000 in burial instances to avoid loss of any sort. And in the case of whole life insurance, the minimum coverage you will be offered is around $100,000. Of course, it can go higher than this, but going lower will put the insurance company at risk.
2. What Is The Gender Gap In life Insurance?
Records have proven women are always less insured than their male counterparts. That’s because although women earn more today and study proves that they live 8-10 years longer than men, they believe they have a short life.
Owing to this belief, they get a shorter insurance policy and sometimes make wrong decisions. Most women today are the primary source of income in their house but buy fewer insurance policies.
3. How Do I Choose The Best Insurance?
This starts with your definition of ‘the best insurance policy. If you are looking for a cheap insurance policy to cover your expenses, you just need the right pair of hands to find out. There are many insurance companies out there that offer quality policies at an affordable price to meet the needs of your family.
These are designed to accommodate the insured person’s ease and adjust the amount as per the premiums.
4. Can I Get Multiple Life Insurance Policies?
Yes, you can. In fact, it can be a really good strategy to manage your finances and plan a secure future. It lets you stack multiple insurance policies, and you can choose each one for a different purpose and a different period.
However, before you go on purchasing life insurance policies, you need to evaluate the good and bad of each one. Check the benefits and ensure if it’s worth getting or if it promises a good future or not. This can be complex to work with when dealing with permanent life insurance, but term life can be perfect for more policies.
5. Are There Any Alternatives To Insurance?
Yes, if you have no dependencies and only need it to pay debts. In such cases, you can approach some lending institution or credit card company to get their insurance cut-off offers on your huge debts.
This does not give out a huge amount like that of the insurance and only pays a few dollars a month. However, it pays the same amount even in case of any unfortunate events and can even clear that debt. If you use a lending institution for this purpose, remember to deduct that amount from the death benefit you get.
6. What If I Get less Insurance Coverage?
You can jeopardize your family’s universal life if you buy less insurance coverage. If you have not left behind much and you were the sole breadwinner, your family will see financial suffocation in less than one month. Especially if you had loans and mortgages, your family would have nothing, and they would be forced to let go of the housing.
Without insurance for your family, they may be unable to confront the challenges of life and deal with small and big expenses. This is why adding your insurance to your financial plans is necessary. It does not help you but saves your family from hard times.
7. Who Do I Need To Consult About Insurance?
Deciding what coverage you need can be difficult, and you can have the help of any insurance agent. These licensed agents are there to answer any questions you might have about buying the right insurance.
If you do not feel confident enough to talk to an agent and finalize matters, you can talk to a financial advisor and seek advice on how much debt you have and how much savings can help you get rid of it.
8. Do You Need Insurance After The Age Of 50?
Yes, it is a good idea. Younger people buy insurance to support their families and children in case of unexpected demise. But it can also be used by older people who don’t need to support their children but use it for inheritance purposes, making a trustee, giving to charity or other business.
Conclusion: What Is The Right Amount Of Life Insurance Cover I Required?
Getting an insurance policy is the best thing you can do for your family. Not only does it protect their rights within your life, but you rest assured that your family won’t suffer after your death. However, there are several parts comprising the equation of how much life insurance you need.
The death benefit you choose can vary depending upon the need of the hour and your usual expenses. Talk to an expert and make a wise decision. We have listed a bunch of ways in which you can get the right amount of insurance from the company. Make sure to try them out.
That brings us to an end. This article presents all the key financial decisions you should take into account. As such, following it may allow you to make more informed decisions.
