How Much Life Insurance Is Enough?

“Two things are promised in life. We all will pay taxes, and we all will die.”

Life insurance is necessary for your financial planning unless you're wealthy enough to support dependents after death. By support, your assets and liquid cash will need to be able to pay off your home and take care of household bills, emergencies, and college expenses after you’re gone. If you care for your sick spouse or parents, you would need enough money to put them in senior living or a nursing home that meets your standards and money to get the medical care they’ll need.

In this month's newsletter, we will discuss how much life insurance is enough by looking at:

• The DIME Method
• The 10 to 15 Rule
• And Calculating your assets

Disclaimer: This information is for educational purposes only. This is not financial advice. Everyone’s situation is unique. Therefore, you should contact a licensed life insurance professional to consider all your options before deciding.

?Let’s discuss how to calculate your life insurance needs

1. First, write down your age; this is important to determine how many working years you have ahead of you. There is something called the DIME formula (Debts, Income, Mortgage, and Education expenses).?

Let’s begin with Debt…

1. Debt- Calculate your total household debts (student loans, credit cards, car loans, etc.). You will not put your mortgage here.
2. Income- Write down your annual income before taxes.?
3. Mortgage- How much is your remaining balance? Be sure to include taxes, homeowners insurance, etc.??
4. Education- If your kids attend private school or college, you must factor their tuition into your policy amount. Once you have that number, calculate how many years you will be expected to pay tuition. Keep in mind that most tuition will increase each year. The rule of thumb is usually 100K per child. If your child will need more than that, they may need to apply for scholarships or grants, do a work-study, or take out a student loan.

Most agents suggest getting 10 to 15 times your annual income if the DIME formula seems a bit much. For example, if you earn $75,000 a year to support your family for the next 15 years, you would need to purchase a policy for $1,125,000. The issue with this approach is that it takes a more general approach but doesn’t consider your unique circumstances.

Another factor to consider is how much assets and liquid cash you have. This money can help fill in the gap for whatever your policy doesn’t cover if the premium is too expensive to purchase more coverage or you don’t get approved for your policy amount. Here are questions you need to answer:

1. How much money is in your retirement account, and how many years do you have left to avoid early withdrawal penalties?
2. Write down all of your investment accounts and how much is in each account.
3. Will you be eligible for social security, and if so, for how much?
4. Do you earn money from any royalties or passive income?
5. Do you have money put away in a savings account?

Once you write down all of these numbers, add them up and write that number down.

From here, you will need to follow a few more steps:

1. Determine if you would like to get term life insurance, which is cheaper but will only last a certain amount of years. Or should you get permanent life insurance, which is generally more expensive but has no expiration date as long as the premiums are paid to keep the policy in good standing?
2. Coming from a person who is a recipient of a life insurance policy. You need to master the art of budgeting so that the money can last as long as possible.

The Bottom Line

To calculate how much life insurance you’ll need, you can either use the DIME formula or calculate 10 to 15 times your annual income before taxes. Also, don’t forget to calculate your assets and liquid cash as additional income for your dependents.

So which method do you plan on using to calculate your life insurance policy amount?

Be sure to leave a comment below.