It’s imperative to understand and determine how much coverage you need to protect your loved ones.
Unfortunately, death is inevitable. We have no idea when we will die, so it’s crucial always to be prepared. It’s even more important to be ready when you have a significant other and family relying on your money or time. Putting together a plan should include purchasing a life insurance policy because this will give your loved ones the money they need to pay their bills or hire extra help. There is no one-size-fits-all for insurance, so you must take time to research and determine the amount of coverage you and your family need. Take a look at these tips to help you along the process of calculating your life insurance policy needs.
4 Tips for Calculating Your Life Insurance Policy Needs
Understand the Type of Insurance You Need
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As we mentioned before, various types of insurance can have different premiums for each person. Before you calculate your life insurance policy needs, you need to determine what type of insurance is most suitable for you and your family. The two most common types of life insurance are whole and term policies. A whole life insurance policy is with the policyholder for the rest of their life, as long as they continue to pay the premium. Part of that premium is turned into cash value that can be saved, used for retirement, or invested. Term life insurance policies are much more affordable and easier to understand. They do not have the cash value aspect and are only purchased for a specific period. The term can be anywhere from 5-30 years.
If you are searching for the most inexpensive plan, a term life insurance policy is probably right for you. It can also be the correct choice if your children will be going to college during the term of your policy. When you no longer have dependents, you might not need as much coverage. On the other hand, a whole life insurance policy is beneficial for those who will have dependents their entire life.
Uncover How Much Money Your Dependents Need
A large portion of your life insurance policy will be determined by how much money your dependents need. This is because your policy payout will most likely be going towards these different things. There are two important items that you should consider when determining your life insurance needs. The first is debt, and the second is income replacement. Your debts can be one of the most significant factors in life insurance because you do not want to put that burden onto your loved ones. If you were to pass away unexpectedly and still had a student loan, business loan, or mortgage, the cosigner or a loved one will face paying it off. The policy should be large enough to pay off all of your debts in full — don’t forget to calculate interest.
You should consider the income you are bringing in now and how much you want to replace if you pass away. If you are the family’s breadwinner, you should consider replacing your entire salary plus extra to guard against inflation. Many experts recommend that you should purchase a policy that is 10 to 15 times the amount of your annual income.
Use Equations to Calculate the Amount
The amount of life insurance coverage you need is not something that you can guess or estimate. So it’s crucial to be as detailed as possible to ensure that your family is protected. There are various calculations and equations that financial experts have come up with, but there are two that are extremely common — take a look.
Multiply by 10: Multiplying your income by 10 is a general rule of thumb that has also been seen to be seven or fifteen. Because it’s hard to pinpoint and find the sweet spot, it’s best to add up your total needs and subtract the assets your family could use if you died.
DIME: The DIME Method is a way to remember everything you should add together when determining your life insurance coverage.
- D: Debt
- I: Income
- M: Mortgage
- E: Education (This is if you would like to pay for your children’s schooling with your payout.)
Consider Your Afterlife Expenses
If you were to pass away, your funeral and burial are another expense your family has to deal with when you are gone. The average funeral can cost anywhere from $8,000 to $10,000, which is a lot of money for most families. Many policyholders will use their payout to give their loved ones peace of mind that the funeral is one less thing they need to worry about during this time. They will be grieving immensely, so finances are probably the last thing they would like to have on their mind. Estimate how much your headstone, funeral service, and more could cost you and add that into your coverage.
Everyone has financial obligations, but no one wants to put those burdens onto someone else if they pass away. Calculating your life insurance policy needs is crucial when purchasing a plan because various families have different needs. The Fabric app is your one-stop shop for all things considering affordable insurance and finances. You can find affordable term life insurance, assign a guardian to your children with a will, and receive a tool to plan your family’s financial future. Download the app today to put yourself at ease knowing your loved ones are protected.