The DIME formula: Calculate the amount of life insurance you need using this method

Dubai: In order to know if you need life insurance in the first place, simply determine if your potential death would have a financial impact on someone in your life. If so, consider purchasing life insurance.

Life insurance is a contract between you and an insurance company that states that in exchange for the regular premium payments you make, the company will pay a benefit to your beneficiaries when you die.

A life insurance policy essentially provides a measure of security for your loved ones, especially if your income was a source of support for them. Beneficiaries can use your life insurance proceeds to cover day-to-day living expenses, pay for college, and eliminate debt.

Life insurance can also compensate a family to help pay off any financial debts or business expenses you may leave behind.

How do I determine how much life insurance I need?

A big part of deciding how much life insurance you need comes down to determining how much money your loved ones would need to stay on a solid financial footing after you’re gone.

There are several ways to calculate the amount of life insurance that’s best for your situation, but there’s more than one rule of thumb to keep in mind before making your final decision.

A rule of thumb is the Human Life Value (HLV) approach, which is usually calculated by considering a number of factors.

This includes your age, gender, expected retirement age, occupation, annual salary, benefits, and the personal and financial information of your spouse and dependent children, if any.

How do I determine how much life insurance I need?

Another rule of thumb says you should have one or more life insurance policies with a total death benefit equal to about 10 times your annual salary.

This strategy does not consider your finances other than your income, existing assets or the needs of your beneficiaries; however, it is a basic starting point.

Another way to calculate your protection needs is to multiply your annual salary by the number of years remaining before retirement.

For example, if a 40-year-old man currently earns Dh20,000 per year, he would need Dh500,000 (25 years old multiplied by Dh20,000) in life insurance.

The DIME formula: Calculate the amount of life insurance you need using this method

Another rule of thumb is the DIME formula for determining how much coverage you need. DIME is an acronym that stands for Debt, Income, Mortgage, Education Expense.

Final debts and expenses: Add up all loan balances, except mortgages, and an estimate of your funeral expenses. All existing debts must be added together to determine how much it would cost to pay off the balance owing after an untimely death.

Income: Multiply your annual income by the number of years you think your dependents will need help. For example, if a spouse and children depended on the policyholder’s annual income of Dh50,000 for another 15 years, coverage of Dh750,000 would be required.

Mortgage: Figure out how much you owe on your home, including any second mortgages or lines of credit on it. Thus, the remaining mortgage balance must be taken into account and added to the amount of life insurance protection purchased.

Education: Estimate the cost of raising the children you have. To ensure that your children receive an adequate education, determine the amount of education costs and add this amount to the death benefit.

By adding up all these obligations, you get a much more complete picture of your life insurance needs. You can also modify this method to include additional expenses, such as medical expenses or retirement funding.

There are also a few things you may be able to subtract from this number, such as the coverage amount of a group life insurance policy, your retirement plan funds, or any other savings you have accumulated.

Growing demand to support the growth of Islamic insurance premiums

Is DIME the preferred approach to find out how much life insurance I need?

Is DIME the preferred approach to find out how much life insurance I need?

The DIME method can be trickier than other approaches to calculate the amount of life insurance required.

For example, a simpler technique is to simply assume that the death benefit should equal 10 times the covered person’s salary, as discussed earlier. In this case, someone who earned Dh50,000 would assume they need Dh500,000 coverage.

But while the rule of 10 has the advantage of being simple, it’s also inaccurate and doesn’t take into account each person’s unique circumstances. For example, a potential policyholder may have stretched out to buy a mortgage and take out a large loan on the assumption that their salary would increase over time.

This could mean that surviving family members would be saddled with a huge mortgage if the life insurance payout was simply based on the deceased’s current salary at the time they purchased the coverage.

Since life insurance is a major purchase, it is worth considering the specific costs and establishing a personalized death benefit based on the insured’s financial situation and future goals.

This is why the DIME method can guide consumers in buying life insurance and is an excellent way to determine the amount of a death benefit.

At the end of the line ?

Experts recommend that you get life insurance coverage for 10 to 15 times your income. This ensures that you have enough coverage to support your family financially for the long term.

Count your financial obligations and subtract your existing life insurance policies and cash, such as your savings accounts.

Even if you don’t need life insurance right away, you should get coverage as soon as possible. The cost of life insurance increases as you get older and your health deteriorates, so buying a policy while you’re younger is the best way to get more coverage for less. .

Your beneficiaries can use life insurance money for almost any expense. Generally, it is used to cover funeral expenses, school fees, mortgage payments, and day-to-day bills and expenses.

Comments are closed.