Life insurance is one of the most important financial products that most people buy. A life insurance policy can protect your loved ones from financial disaster. It does this by paying a death benefit to the chosen beneficiaries when the policyholder dies.
Anyone whose people depend for their income or services should have life insurance. But what coverage is needed? Here are three ways to decide on the right amount of coverage to buy.
1. Use the DIME formula
The DIME formula is one of the best and most comprehensive methods of determining how much life insurance to get. Here’s what DIME stands for:
- Debt: People want to buy enough coverage to ensure that their unpaid debt can be paid in full when they die. It may also be helpful to include final expenses in this category, as funeral expenses can be quite high.
- Returned: Life insurance death benefits are a form of income replacement. Those who depended on the money the deceased earned can use it to finance their living expenses. An easy way to calculate this is to decide how many years of income need to be replaced by the policy and multiply that amount by the annual income. For example, replacing $ 50,000 of annual income for 10 years would require coverage of $ 500,000.
- Mortgage: Paying off a mortgage with a death benefit can give surviving family members a place to live. So it makes sense to get enough coverage to pay off a zero mortgage balance.
- Education: Parents who buy life insurance often want enough coverage to pay for their children’s education costs.
So, using the DIME method, those who buy life insurance can usually get enough coverage to take care of those who stay by adding up the amount of coverage needed for:
- Pay off the debt
- Replace income
- Pay off a mortgage
- Cover children’s education
2. Take a multiple of the insured’s salary
The DIME formula is comprehensive, but it can be complicated. For those who want to quickly determine how much life insurance they need, the simplest approach is to assume that they will need 10 to 12 times their salary in coverage. So, a person earning $ 50,000 a year would need $ 500,000 to $ 600,000 in life insurance protection.
This approach has the advantage of being easy, but it can lead to buying too little protection for someone with high debt, a large mortgage, or many children to bring up.
3. Use a life insurance calculator
Finally, many life insurance providers have calculators on their websites that are designed to make it easier to calculate the amount of insurance coverage to purchase. These calculators involve entering simple information about the family’s income, debt, and needs.
Whatever approach is used, the important thing is to put in place sufficient coverage as soon as possible. No one wants to leave loved ones with financial problems if they die unexpectedly, and purchasing coverage while they are as young and healthy as possible helps prevent this from happening.