Within our frequently asked questions… people wonder how much insurance they need to be financially secure in case of an eventuality. Short answer – it depends. Here’s what you need to know…
First of all, you must understand if anyone depends on you, then you need life insurance. Then, we can move to what type you need, followed by the ideal amount of coverage.
Exactly How Much Coverage Should You Aim For?
We’ll guide you through a couple of basic questions that will whisper you the answer. Your life insurance needs some analysis. Before we start, grab a piece of paper or something to write on; your smartphone would also work well. It’s a quick exercise definitely worth giving a shot.
The first question...
1) How much debt do you have?
We’re talking besides your mortgage here. Whether you’re spending more than you earn or paying for your car on a monthly basis, write it down. Take debt into consideration as it’s the FIRST number you should know in order to pay it off.
2) How much do you spend each month?
Any type of expense, anything that comes out of your pocket, add it all up and write down the final number. (Please don’t try to guess this one… you’d better get the right number to protect your family in the future)
Imagine reaching a false conclusion that ends up not being enough for your family… you wouldn’t want that, would you?
3) How much do you save each month?
How does that piggy bank look like? How much money do you put aside? This question is important as it makes you realize it might be necessary to replace all your income with insurance. If you have a fat piggy bank, then you might need less coverage.
Actually, let’s break the pattern here for a second… pay close attention.
Assuming your family invests $500,000 from your death benefit for an annual interest of 5%. That means they would earn $25,000 dollars more every year. This number should match your annual salary to replace your income.
Golden Rule – You need enough coverage to match your annual income.
So if you earn $25,000 dollars a year, then you might need a $500,000 coverage. Rough estimate.
Alright, back to the questions...
What are your long-term goals? If you’ve prepared yourself for your retirement, well done! Otherwise, you should aim for more coverage.
Finally, how much income the people who depend on you need? Include all types of expenses: education, mortgage, food supply, etc.
Keep in mind our money tends to lose its value over time due to inflation while interest rates increase. Because of this make sure when you request life quotes you go a little bit higher on the scale.
3 Basic Ways to Calculate Your Coverage
1 - Multiply your Income by 10
We don’t urge this method as it’s too broad to work with. It doesn’t include possible future expenses, education or asset growth (the increase in value of your assets over time). But if you’re on a run, then take it for a quick estimate.
2 - Multiply Your Income by 10 + $100,000 per Child
A similar method for those who have kids. Again, it’s a general way to calculate coverage. However, future obligations and assets aren't taken into account, making it a little bit inaccurate.
3 - The DIME Formula
D - Debt & financial expenses
I - Income
M - Mortgage
E - Education
A more direct approach where deeper areas are evaluated. Simply add these up to get an approximate coverage.
We share these methods with you in case you’re in a hurry or don’t want to go deep into numbers. Either way, the best tip we can give you is that whatever number you get, you aim higher. It will always be better to leave a gap between how much you need and how much coverage you get.
Among the types of life insurance in the market, term and whole life are the most popular. If you’re a parent of young kids, here’s our suggestion…
Besides protecting yourself and your family, your kids also need financial help for their future. We suggest whole life insurance for them to build up cash value and provide for them when they need it the most. If you’re interested, click here to learn more. Whole life insurance can be 6 to 10 times more expensive than a term policy, though.
Here’s an example of how whole insurance can greatly help you…
Let’s say, Mike, a 27-year-old adult is searching the Web for life insurance. However, he must calculate how much coverage he needs to provide for his wife Jenny and his infants Marco & Matt.
Both Mike and Jenny have always taken care of their health, exercising regularly and eating properly, so how much should life insurance cost? No more than $400 a year.
But they’re looking to slowly build up cash value for their two kids. If budget isn’t quite a problem, what could they purchase?
Maybe they could buy term life insurance for the entire family. But they wouldn’t be able to build up cash value. That’s why Mike better decides to buy term insurance for Jenny and himself and invest a little bit more in his kids’ future with whole life insurance, which as long as he keeps paying it won’t disappear.
In case money gets tight, they can withdraw funds anytime from the cash value they’ve built up in their kids’ policies. 20 years from now, Marco & Matt would graduate from college and they could use these funds to make a down payment for their first home or to cover any other need they might encounter.
Do you see how whole life insurance works?
Even though you can find plenty of cheap life insurance quotes, sometimes stretching yourself with a bigger investment might be of great help for your family, to the point where not only are you securing a couple of months or years of your salary in case you’re missing, but you’re giving your kids a small leap towards their journey when they most need it without having to die to withdraw these funds.
Now you know how to calculate coverage by yourself and how buying whole life insurance for your kids might help them hugely. Anyways, here are some tools that will help you make a confident decision: