Not sure how much life insurance to buy? Try this simple formula to find out
This formula could be the key to getting the right amount of life insurance coverage.
- Buying life insurance is important to protect loved ones.
- When purchasing life insurance, it is important to determine the amount of the death benefit.
- A simple formula called the DIME method can help determine the appropriate amount of life insurance.
When purchasing life insurance, consumers must make a critical choice during the policy acquisition process. They must decide the amount of their death benefit.
Policies with a higher death benefit have higher premiums, so it’s best not to increase the death benefit more than necessary. But if the insured dies, more money will be paid to the beneficiaries if the death benefit is larger. So the trick is to make sure that the amount of the death benefit sufficient protection, but not too much.
There are many approaches to determining the right amount of life insurance coverage. A simple shortcut is to multiply the income by 10 and buy a policy for that amount. But there is actually a simple formula that can be very effective in getting the right death benefit. Here is what it is.
Consider the DIME approach when buying life insurance
When purchasing life insurance, the DIME formula can help determine the appropriate death benefit. DIME stands for:
When you follow this formula, it means the death benefit must be large enough to cover:
- The total outstanding balance of any debt which has been accumulated by the policyholder
- The total amount of policyholder income that needs to be replaceddepending on how much they were earning and how many years their income will be used by surviving dependents
- The total outstanding balance of any mortgage loan on property belonging to the policyholder
- The total estimated cost of raising children the policyholder has
It is usually easy to get precise numbers for these items. Therefore, using this formula can help consumers purchasing life insurance determine exactly how much coverage is needed to cover their remaining obligations in the event of death – and to support the people they leave behind. .
Why this formula can be a great way to get the right amount of coverage
The DIME formula can be a much better way to determine the amount of appropriate life insurance coverage than shortcuts such as multiplying income by a set number.
The simple reason the DIME formula is such a good approach is that it takes into account each person’s unique situation. Someone who has more children, for example, would probably need a larger life insurance policy than someone who has no children, because raising children can be expensive.
Similarly, a person with a large mortgage would need to ensure that there is money to pay off that loan to allow the home to remain in the family, while a person without a mortgage may not have need that much coverage. A method that simply multiplies income will not take these factors into account.
The reality is that the purpose of buy life insurance is to provide for the unique needs of survivors who are left behind. And making sure loved ones can keep their homes, cover debts, and get an education are key to providing for those coping with the untimely death of a family member.
It’s worth the effort to do this calculation and take a personalized approach to deciding on a life insurance death benefit, because once a death has occurred, it’s too late to return. back and get more coverage.
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