Generally, you need to purchase enough life insurance to mitigate the financial hardship your loved ones will experience in your absence. Determining what that amount is, however, can be a little tricky.
A life insurance policy is a very important part of your family’s overall financial plan. Although technically not a part of your estate plan, it can work in tandem with it to ensure your loved ones have financial resources available to them when you pass away.
Just as your estate plan is unique to you and your financial situation, so too is your life insurance policy. Your financial situation and obligations, then, should reflect in the amount of life insurance you ultimately purchase.
Beware Any Rule of Thumb When Purchasing Life Insurance
There are a few popular rules of thumb out there when it comes to answering the question, “How much life insurance should I buy?” A common one of these rules is to purchase coverage roughly equal to 10 times your annual income. Another rule of thumb is to purchase coverage around 30 times your annual income.
Although these answers are simple and easy to figure out, that’s also their fault. Basing your life insurance coverage solely on your income fails to account for your current debts and your family’s future expenses, such as your children’s education.
The DIME Formula
You can arrive at a more accurate estimate of how much life insurance you’ll need by using the DIME formula, which takes your income and important expenses into account.
The DIME formula focuses on the following:
- Debts: The total amount of all debt you currently owe, excluding your mortgage.
- Income: Your annual income from all sources multiplied by the number of years you think your family will need financial support.
- Mortgage: The remaining balance on your mortgage, second mortgage, lines of credit, and liens.
- Education: How much you think your children’s total education will cost. This typically refers to college education, but if you want your children to attend private school until college, you should consider the cost of that tuition as well.
By combining the expenses above, you might find that you may need to purchase more or less life insurance than a rule of thumb led you to believe. Always remember, though, that any estimate of how much coverage you’ll need is just that – an estimate.
Our Insurance Experts Can Help
Another way to assess how much life insurance you’ll need to purchase is to consult with one of our experts at Insurance Specialists, Inc. We can provide you with the information you’ll need to assess how much life insurance you should purchase to ensure your family can avoid financial hardship in your absence.
If you’d like to learn more about how we can help, reach out to Insurance Specialists, Inc. online today!