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How Much Life Insurance Do You Need?

It is one of the most common questions: How much life insurance do I need? The answer might be easier than you think. 

Life Insurance coverage is an important part of everyone’s financial plan, but life insurance is not one-size-fits-all. Your situation, obligations, and priorities are unique to you, and the amount and kind of life insurance you buy should reflect that. 

What is traditional life insurance?

Traditional life insurance, in a nutshell, is an agreement between you and an insurance company. The agreement is that you pay premiums and in return, the company agrees to pay a specific amount to your beneficiaries when you die. It can be reassuring to know that your loved ones will have additional resources not only to cover funeral costs but to be able to take care of their needs for a while if something were to happen to you.

What are Living Benefits?

A living benefit rider is additional coverage on your basic life insurance policy that provides supplementary benefits and protection to you while you are living. For example, if you’re terminally ill your life insurance policy may pay out a portion of your death benefit while you’re still alive to help cover expenses in a crisis. 

When buying life insurance, you will want benefits that are large enough to cover the bills and expenses you won’t be able to help with if you have a chronic or critical illness. If you’re the primary income earner, that includes things like:

  • Replacing income from your job
  • Covering your mortgage or rent
  • Paying off debt, including credit cards and car loans
  • Saving for college
  • Childcare expenses
  • Household duties
  • Funeral expenses

Basically, you need enough to cover all the extra costs your family would have in your absence, especially while your kids are still at home. And generally the more dependents you have – and the younger they are – the more life insurance you need.

So how do you know how much life insurance to buy?

The DIME Method

There is a tried and true way to calculate just exactly how much life insurance you need – the DIME method. 

DIME stands for Debt, Income, Mortgage, and Education – the four big factors to consider when making a more detailed estimate of your life insurance needs.

Debt: Total all your debts other than your mortgage. Car payments, credit cards, student loans – even personal obligations such as money you may have borrowed to put a down payment on your house. On top of all that, add about $7,000 for funeral expenses.

Income: What is your annual income? And how many years will your family need that money? While it can be a hard question to answer, a good place to start is to look at how many years until your youngest child graduates high school. For example, if you make $50,000 and have nine years until your youngest graduates high school, put down $450,000 for income.

Mortgage: Look at your last statement and get the payoff amount. If you have a second mortgage or HELOC (Home Equity Line of Credit) add that in as well (if you haven’t already included it in the debt section above).

Education: The anticipated cost for sending each of your children to college. A good rule of thumb is to calculate between $100,000 and $150,000 per child.

Add up those four factors and that’s your number. Simple!