To keep it simple, a lot of insurance carriers recommend that your coverage be at least 10 times your income if you’re near retirement. At a younger age, you may need additional coverage. For example, if you are under 40, you may want to consider up to 30x your current income.
However, this recommendation doesn’t take into consideration other beneficiaries and dependents. The amount of coverage you need will be unique to your situation and goals. To determine how much coverage you need, think about your financial obligations, including debt and income replacement.
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One way to estimate how much life insurance you need is to use the DIME formula. DIME is an acronym that stands for Debt, Income, Mortgage, and Education. The DIME formula is especially useful because it accounts for other financial obligations you may have when determining how much life insurance you may need.
Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
Decide for how many years your family would need support, and multiply your annual income by that number.
Calculate the amount you need to pay off your mortgage.
Estimate the cost of sending your kids to school and college.
After adding up the expenses, you should subtract any existing savings or life insurance coverage you already have.
This method gives a well-rounded view of the financial obligations you should consider when determining your life insurance coverage.
Life insurance should be a part of your personal and family’s financial plan. To choose the right amount of coverage, be sure to consider the future growth of your assets and income, as well as future expenses including education costs and other needs of your dependents.
Your goals and budget will determine how much risk you can afford to take off the table by purchasing life insurance.
Regardless of what happens to you, life insurance allows your family’s financial outlook to remain the same. Life insurance gives you and your family peace of mind that they will always have the financial support they need should anything happen to you.
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