What is sufficient coverage? – Forbes Advisor
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It is essential to obtain sufficient life insurance coverage to ensure that your loved ones will be financially taken care of if you pass away. A life insurance calculator is one way to determine what you need.
Let’s take a look at how you can decide how much life insurance you need and how a life insurance calculator can help you find the right coverage for your specific situation.
Tips for calculating how much life insurance you need
Here are the things to keep in mind when deciding on your life insurance needs.
Determine the type of life insurance you need
The reason you buy a life insurance policy determines the amount of coverage you need.
- Do you need life insurance coverage until you pay off your mortgage and during your children’s college years? In that case, a term life insurance policy to cover those years may make sense.
- Would you like lifetime coverage or the ability to build cash value? So a permanent life insurance policy would be preferable.
Consider other life insurance policies
You should consider all existing life insurance policies when assessing your life coverage needs.
- Employers often offer group life insurance to employees. These policies are usually provided free of charge, but offer limited death benefits and are tied to your job. Once you quit your job, you will likely also lose your life insurance coverage.
- However, you can subtract existing life insurance when calculating your life insurance needs.
Consider other life insurance benefits
You can customize a life insurance policy with endorsements.
- A life insurance rider is an optional addition to a policy that provides additional coverage. Depending on the rider, you may be able to get coverage during your lifetime.
- An accelerated death benefit rider is often included for free in life insurance policies. It can be very useful as it allows you to access your own death benefit money if you are terminally ill.
- Other riders, such as a long-term care rider or a waiver of premium rider, usually add fees to the policy, but are a way to customize life insurance to get exactly what you want. .
life insurance calculator
An easy way to determine your coverage needs is to use this life insurance calculator. Enter your annual income and the number of years your dependents will need financial support, debt, future tuition, funeral needs, savings, and any other life insurance coverage, and you will get a result immediately.
How much life insurance do you need?
Answer simple questions in our 3-step process
The formula of our life insurance calculator
A good estimate of life insurance needs requires using a formula that includes your future financial obligations and your assets, such as savings, that your loved ones can use if you die.
We use this formula in our life insurance calculator above.
The first step is:
- Take your annual income and multiply it by the number of years your loved ones will need that salary. So if you earn $50,000 and want to provide that income to your family for 10 years, that will net you $500,000. (If you’re caring for a child, you can estimate how much it would cost to get child care if you die rather than using salary data.)
- Combine financial obligations including your mortgage, future tuition, credit card debt, and loans. Let’s say these total $300,000. This gives you $800,000 for annual income and financial obligations.
- Now you will want to subtract your assets. For example, let’s say you have $200,000 in savings and other sources that your loved ones can get if you die. You would deduct this from your income and financial obligations.
- Our example would mean that the person might need $600,000 in life insurance.
How to manually calculate the amount of life insurance you need
In addition to using the life insurance needs calculator, there are other ways to estimate your life insurance needs. Here are four options.
Multiply your annual income by 10
The income multiplied by 10 method is the easiest way to get an estimate, but it’s also not a very good method. You take your annual income and multiply it by 10. That’s it.
So if you make $100,000 a year, multiply that number by 10. That’s $1 million in suggested coverage.
But using this method could leave you extremely underinsured. It does not take into account many factors that should go into a life insurance calculation. These factors include your debts, your mortgage, and your children’s future education needs. It also ignores stay-at-home parents, who may not have a salary but whose household contributions are essential.
If that parent dies, the family may have to pay for childcare, housekeeping, and other services. The “10 times income” method does not take this into account.
Multiply your annual income by more than 10
Multiplying your income by 10 might not be enough. But as we mentioned, simply multiplying your annual income by a rather random number doesn’t take into account your individual circumstances. It’s best to use a life insurance calculator that takes into account both anticipated needs and existing assets that could be used.
10 times income plus $100,000 for college
If you have children who have future college needs, another option is to multiply your income by 10 and then add $100,000 to pay for college.
Much like the income times 10 method, simply adding $100,000 for college gives you an estimate, but doesn’t take into account other factors that should influence your life insurance coverage.
The DIME method
The DIME method includes more life insurance factors than multiplying your income. DIME stands for:
- Final debts and expenses: Calculate all of your debts, including credit cards and loans, as well as estimated final expenses, such as funeral costs.
- Income: Determine the amount of money your loved ones will need each year and multiply it by the number of years they will need this support.
- Mortgage: Check how much you owe on your mortgage.
- Education: Think about your children’s future educational needs, including college.
Combine all of these expenses and it should give you a rough estimate of how much life insurance you need. The DIME method does not include your savings or costs such as childcare, so keep that in mind.
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