To determine the amount of coverage you need, start by calculating your long-term financial obligations, then reduce it to your assets. What remains is the gap (shortage) that must be filled in by life insurance.
Many insurance brokers advise you to make financial decisions with confidence. You cannot determine the ideal amount of life insurance that you have to buy for just a penny. But you can make precise estimates if you consider your current financial situation and consider the needs of your loved ones in the coming years.
How much life insurance do I need?
In general, you should find your ideal number of life insurance policies by calculating your long-term financial obligations and then reducing your assets. The result is the gap that life insurance must fill in. But, it might be difficult to determine what items should be included in your calculations. There are some rules of thumb that are widely circulated to help you determine the right amount of coverage. Here are some of them:
Rule of thumb No. 1: Double your income to 10.
"This is not a bad rule, but based on our economy today and interest rates, it's an outdated rule," said Marvin Feldman, president and CEO of the insurance industry group, Life Happens.
The "10 times income" rule does not pay attention to your family's needs in detail, nor does it take into account your savings or existing life insurance policies. And also, it does not provide coverage for parents who are working hard to earn income for the family.
Both parents must be insured, said Feldman. That's because the value of the parents' hard work to meet the needs of the family members is irreplaceable but insurance can fill in the obligation when unfortunately, death comes. In addition, the remaining parent must pay someone to provide services, such as child care, which are supposedly provided by parents for free.
Rule of thumb No. 2: Buy 10 times your income, plus a budget per child for tuition
Education costs are an important component in your life insurance calculation if you have children. This formula adds another layer to the "10 times income" rule, but it still doesn't pay close attention to all your family's needs, assets, or any existing life insurance protection.
Rule of thumb No. 3: DIME Formula
This formula encourages you to look into your finances in details than the other two rules. DIME stands for debt, income, mortgage and education. These are the four areas that you should consider when calculating your life insurance needs.
Debt and final fees: Add up your debt to your mortgage, plus your estimated funeral costs.
- Earnings: Decide how many years your family will need support, and multiply your annual income by that number. Multipliers may be the number of years before your youngest child graduates from high school. Use this formula to calculate your income replacement needs.
- Mortgage: Calculate the amount you need to pay off your mortgage.
- Education: Estimate the cost of sending your children to college.
This formula is more comprehensive, but it does not take into account the life insurance and savings coverage you already have, and it does not consider the unpaid contributions made by parents who are making their utmost effort to fulfill their duties.