How Much Life Insurance Do I Need – Overview
Life Insurance is crucial if you plan financial freedom for your family. It becomes an essential thing like health insurance. However, not everyone requires the same life insurance, as people have different plans to manage their financial stages. How much life insurance do I need? If you are questioning the same thing, this guide will give you the best answers!
Before calculating how much life insurance you need, let’s collect some basic information about life insurance and its benefits first. Do you know what makes life insurance an essential part of your life? Let’s find out!
Why Do You Need Life Insurance?
We all have heard about life insurance, but do we care about it? No! Life insurance is a plain agreement between you and the insurance company. You agree to pay the said premiums i.e. either monthly, quarterly, half-yearly, or yearly, and in return, the company agrees to pay a fixed amount to your beneficiary i.e. your family, after your death.
A life insurance policy assures you and your family that your future will be bright and there will be no shortage of money. You can give financial freedom while alive to your family by getting your life covered with a reliable life insurance company.
But how much life insurance do I need? How will I pay my premiums? How much money do I have to pay to the insurance company?- let’s find out the answers!
How Much Life Insurance Do I Need?
In a nutshell, we all need huge amounts of money after death so our family can live worry-free. The amount of your life that a life insurance company gives to your family after your death is based on how much premiums you have paid while you were alive.
If we talk about the premium paying terms, people who come from different income groups can cover their life as per their income sources. If you have limited income, you must pay premiums as you will have to spend your money on other things to survive.
If you are the only earner in your family, you will have to spend more money than those with multiple earners. If your family has no earner, you will have to add extra money to your life insurance so they can live better even without earning money after your death. So yes, such families need more life insurance than those with multiple earners.
You need to consider many factors when deciding how much life insurance you need. According to financial experts, you need to cover up to 10 times your annual income to bear the cost of your death. It is an assumption made by the experts. You can arrange the amount as per your needs, and it could be higher or lower!
Factors to Consider While Deciding Life Insurance Coverage
1. Your Debt
Did you know you can cover up your debts using your life insurance coverage after your death? You can cover debts such as mortgages, car loans, student loans, personal loans, credit card bills, etc. If you have such debts while you are alive, you have to get maximum coverage so your family can repay the debts and have extra funds for other things.
If you have a $100,000 mortgage, $5,000 car loan, and $1,000 credit card bills pending, your life insurance coverage must be above 105,1000 and interest. Make sure that the life insurance that you are taking is above your debts so that your family doesn’t need to pay them from their pocket.
2. Insuring Other Family Members
You can even have other family members in your life insurance policy whom you have more trust. If you have a spouse earning well, her loss will impact your family too. You can ensure the ones who are important and generates money for your family along with you in the life insurance policy.
Your life insurance provider will give you more information about whom to include with your life insurance policy and that’s how you can decide the total life insurance you need.
3. Replacement of Your Income
The replacement of your income is crucial when deciding on your life insurance. If your total income is $50,000 a year and you are a sole provider, then you need a life insurance policy to replace your total earning income. You need to cover the annual income cost and some extra funds to bear the inflation in between.
You have to calculate your debts and your yearly income of yours. Once you are done, you can start shopping for policies from various insurance companies. Compare the policies and bring the best ones to the table. That’s how you deal with the life insurance policy!
What is a Rule of Thumb for Life Insurance Coverage?
There are several Rules of Thumb for life insurance coverage. Here, we have listed down the top-recommended rules of thumb that will help you decide how much life insurance you need to cover your life!
1. The Human Life Value
This rule is based on your future income of yours. In this rule, the amount of your life insurance is 30X your income between the age group of 18 and 40, 20X income for the age group of 41 and 50, 15X income for the age group of 51 and 60, 10X income for the age group of 61-65.
Once you pass the 65-year mark, life insurance is based on your net worth, not your earnings.
2. Add Child Expenses
Secondly, you can multiply your income by 10 and $100,000 to $150,000 per child for expenses. If you have multiple children, you have to add $250,000 for their expenses to your life insurance. Since college and other expenses are not cheap, you must add the maximum amount to your policy to cover the extra costs.
3. DIME Formula
The DIME formula includes your child’s Debt, Income, Mortgages, and Education. We have also discussed all these terms in the above parts of this article. You have to add up your child’s debts, annual income, mortgage payments, and education.
Calculate the expenses of all of these in your life insurance. The life insurance coverage of your policy is more than all the expenses given in the DIME formula.
The Final Words:
The amount of your life insurance should be more than the number of your debts and your children’s education. If you want to give your family full financial freedom, you have to go with the larger life insurance policy.
When you opt for the larger life insurance policy, you must pay larger EMIs. It only happens when you have a decent income. If your income is low and has multiple expenses, you will have to limit your life insurance with low premiums.
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