Life insurance provides your beneficiaries with a substantial death benefit payment when the insured dies. When purchasing life insurance, many people aren’t sure how much coverage they may need. We’re here to help you with the decision-making process.
Keep reading to learn how much life insurance you might need.
What Is Life Insurance?
Life insurance policies are a contract between an insurance company and policyholder. These contracts ensure that a death benefit payment will be disbursed to the policyholder’s beneficiaries when the insured individual dies. There are several types of life insurance, primarily term life and permanent life.
Term Life Insurance
Term life insurance covers the insured for a specified period of time. If the insured dies during the period stated in the policy, their beneficiaries will receive the death benefit. If their policy ends before they die, there won’t be any payment. Term life insurance policies typically offer five, ten, fifteen, twenty, and thirty-year terms.
Permanent Life Insurance
Permanent life insurance covers the insured for their entire lifetime. There are two primary types of permanent life insurance. They include whole life and universal life. Both of these options include a cash savings component that builds value over time. The way the cash savings component works varies depending on which plan you have. Some plans grow at a guaranteed rate, while others are attached to the performance of a market index.
How Much Life Insurance Is Necessary?
The amount of life insurance you need depends on your unique life circumstances. It can be difficult to pinpoint the exact amount you need, but here are some steps you can take to make an informed decision.
Multiply Your Income By 10
When you die, your loved ones may rely on the life insurance death benefit to replace your income. If you multiply your current income by ten, you can estimate what might be necessary to sustain your family for a lengthy period of time. Though, some people criticize this estimation process because it doesn’t take into account the fact that people who don’t earn an income need life insurance too.
Multiply Your Income By 10 Then Add $100,000 Per Child
Like the previous estimation, this option allows you to determine how much insurance is needed to replace your income for ten years. By adding an additional $100,000 per child, you can also account for other needs, such as a child’s education. Unfortunately, this formula also doesn’t take into account all of your family’s needs. Though, it’s still a good starting point.
Use the DIME Formula
This formula offers a more detailed look into your finances, allowing you to make a more informed decision on your life insurance coverage. DIME stands for debt, income, mortgage, and education. These four areas are critical when calculating your life insurance needs.
First, add up your debts and estimate your funeral expenses. Then, figure out how many years your family would likely need support and multiply your income by that number. If you have a mortgage, calculate the amount needed to pay off the mortgage to secure a home for your family. Then, estimate the cost of sending your kids to school and include that amount.
When you add all these numbers up, you’ll have a good idea of what your long-term obligations are. That will help you decide how much coverage is needed.
Find Out How Much Life Insurance You Need
Calculating how much life insurance you need takes time and attention to detail. You wouldn’t want to miss an important factor and purchase too little insurance. You also don’t want to purchase too much insurance because that can get expensive. To get the right amount of coverage, rely on Carolina Senior Benefits.
We’ll help you decide how much coverage is necessary, just give us a call at 704-765-4689.