One in four consumers in the U.S. isn’t insured. The reason? They don’t have any idea how much life insurance they need and where to get it.
This is the 5th top reason why people don’t buy life insurance in the United States. It goes after the other popular reasons such as it being expensive and being less prioritized.
You may often ask, “How much life insurance can I get?” If you’re interested in getting a life insurance but you can’t find the answer to this question, it’s time to be informed.
To give you a quick answer, the life insurance cost you’ll need will depend on how much your family and/or beneficiaries need when you leave them.
Continue reading to know more about the ways you can identify what’s the best insurance value for you.
How much life insurance can I get?
The answer to this question will vary from person to person. Each person has their differences from the income they earn up to the number of beneficiaries they have.
Here’s one general method in finding your target amount. To identify the values you’ll need in the computation, follow these three steps:
Check family needs
Where does your money go? Calculate how much money your family needs to live. This can include basic expenses, taxes, mortgage payments, or medical bills.
You can also add your funeral expenses and possible estate taxes in the formula.
Think about the future
There are financial obligations to consider such as education tuition fees and other future expenses. Add the value you get here to the estimated money your family needs.
Take a look at your money
Where do you get your money? How much do you and your spouse earn?
Add here your savings from different resources together with the existing life insurance policies your employer may be providing.
In the end, take the value of what your family needs and the money you have. The difference between the two will give you an idea on how much your life insurance should cost.
Rule of thumb theories
Finding the difference between your financial obligations and assets is the simplest way to know how much coverage you should get.
But if you’re not sure what to list down as your financial obligations and assets, there are other ways you can do to find the right coverage amount.
Here are the rule of thumb theories you can consider following:
Rule of thumb #1: Multiply income by 10
There’s nothing else to know about this rule as its formula is simple – income times 10.
Multiplying your income by 10 is easy to do. But, it can miss important factors such as your family’s needs, your savings, and more.
Rule of thumb #2: Multiply income by 10 plus $100,000 per child
Number 2 is an upgraded version of number 1 with your children’s future education added to the formula.
If you have children, you’ll expect to spend on education expenses in the future. That’s why you need to add $100,000 multiplied by the number of children you have.
The total is added to your income multiplied by 10 and you’ll get your estimated life insurance coverage.
It’s another easy way of finding out the coverage you need but again, it doesn’t consider the family’s needs and assets.
Rule of thumb #3: The DIME formula
In the DIME formula, you’ll be able to look at the other details that will affect the value of your life insurance.
DIME stands for debt, income, mortgage, and education. These are the four factors you’ll use in the formula.
This should include all kinds of debt you have together with mortgage and funeral expenses.
Think about the number of years your family would need support. It could be the years before your youngest child finishes high school or when he/she reaches 18.
Multiply the number of years to your annual income to know your estimated income replacement cost.
You should know how much you should pay for your mortgage. Doing this ensures you your family won’t need to worry about looking for a place to stay when you’re gone.
Parents need to be sure their children can go to college. Here you can list down the estimated college expenses your kids will need.
Add everything to get your target life insurance coverage.
However, the DIME method misses other details like your current life insurance policy and savings. This can be a problem if you want to see a realistic total coverage cost.
Any tips for knowing how much life insurance can I get?
While calculating your ideal life insurance coverage, you can do the following tips:
Treat life insurance as a part of an entire financial plan
Buying a life insurance shouldn’t be away from your overall financial plan. It should go together with other future plans such as education costs and income increase.
Putting everything on one page makes it easier for you to figure out the needed coverage value.
Buy more than less
You’ve got all these formulas you can use, but none of them can give you the exact amount you’ll need.
Your income and expenses may change in the following years. It’s better to spend more than your computed results to be sure.
Talk to your spouse
Finding your ideal coverage isn’t only about answering “How much life insurance can I get?” You should also talk about it with your spouse to check if the estimates you did make sense.
Buy multiple insurance policies
It’s better to get multiple small policies than getting single yet expensive life insurance policies. These can provide adequate coverage on each insurance need.
Layering multiple policies can save you money and prevents you from getting over-insured.
Choose a longer term
Buying a longer term life insurance gives you more time to increase your assets. It also helps you avoid getting caught short, which may happen if you choose to pay for an insurance with a tighter period.
Let’s make things easier for you
The question “How much life insurance can I get?” doesn’t have a single exact answer. It will depend on your assets and expenses, and also on the results from your calculation.
Did you get your ideal life insurance coverage value using the mentioned methods? If you’ve found the right value for you, get quoted now using our online calculator.