Our world is full of unknowns for most people. However, two things are always certain: death and taxes. While not the cheeriest of subjects, the reality is that what you do now will affect your loved ones when you’re gone. Life insurance is one of the best ways to ensure the long-term financial stability of your family regardless of what happens to you. Here we provide some helpful answers for those asking, “How much life insurance do I need?”
How to Estimate Life Insurance Needs
Everyone’s financial situation is unique. Some have large families with young children and others have student loans or significant medical needs. This is why there’s no one-size-fits-all approach to life insurance.
Life insurance serves to support your loved ones in the event of your passing. A policy’s payout should be sufficient to cover funeral costs and a portion of your dependents’ living expenses, at the very least. However, your individual circumstances will determine exactly how much life insurance you need. Those with outstanding debt, little to no assets, or unpaid medical bills will likely benefit from more coverage.
When estimating your life insurance needs, a good rule of thumb is to multiply your annual income by 10 or 15. This serves as a baseline upon which you can build in the future cost of childcare, living expenses, and educational needs. For instance, consider factoring in between $50,000 and $100,000 per dependent who may need help with college tuition.
A more precise formula for calculating life insurance is known as DIME. It accounts for debt, income, mortgage, and education. First, add up any lingering debts including an estimate of funeral costs. Then, calculate how many years dependents will need support and multiply that number by your annual income. Finally, factor in the remaining balance on your mortgage(s) plus any costs associated with your children’s education. While this method can produce an accurate estimation, it doesn’t account for assets and current savings.
It’s worth noting that you never know how future expenses will change. Inflation, medical needs, and major life events are often unavoidable, so it’s almost always better to have more coverage than you think you’ll need. If you’re unsure about your unique life insurance needs, an experienced financial advisor can help give you peace of mind in this regard.
When to Buy Life Insurance
It’s never too early to think about life insurance. In fact, the younger and healthier you are when purchasing a policy, the less your premiums are likely to cost. Keep in mind that many insurers place certain restrictions on some policies.
There are many distinct types of life insurance policies on the market today. Most of them can be classified as either a term or permanent policy. Term policies only last for a certain amount of time, often between 1 and 30 years. They tend to be affordable and adequate for most people, but recipients won’t obtain a payout if you outlive the policy. By contrast, permanent policies extend until death and may build cash value via investment accounts, but they also tend to be more hands-on and expensive than term policies.
It’s a good idea to buy a life insurance policy if you plan to start a family in the future. An affordable 20- or 30-year term policy will help to support your children until they reach adulthood. A term policy is also beneficial if you’re concerned about future burial costs, wealth transfer, or income replacement. Furthermore, if you’re still paying off a mortgage during retirement, the right policy will prevent your dependents from shouldering that burden once you’re gone. Depending on your age, health, and risk tolerance, a permanent policy with investment potential may be preferable. Discuss your options with a financial advisor if you don’t know where to begin.
Consult a Financial Advisor
This subject can be difficult to discuss, and there are a lot of factors that come into play. Luckily, estimating how much life insurance you need is straightforward. Consider purchasing a policy if you’re young and healthy, starting a family, or concerned about your dependents’ financial future. We encourage you to contact us directly for more information about life insurance policies. Our experienced team of advisors will gladly sit down and discuss your individuals needs together.