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Personal Lines Education Article
How much life insurance do I need?
Life insurance is an important part of planning for the future. In your absence, life insurance can help protect your family’s finances, allow your small business to live on and give you something to leave behind for your loved ones or a favorite charity. Many people understand the importance of life insurance. According to LIMRA, 80% of consumers believe that most people need life insurance and as many as 132 million Americans rely on life insurance to protect their financial security. But when it comes to actually purchasing a policy, the confusion sinks in and one big question often comes to mind: how much life insurance coverage do I need?
A life insurance policy isn’t “one-size-fits-all.” Everyone has a unique financial situation, so coverage needs are just as unique. To answer this question, you’ll need to get your own personal estimate. Although meeting with your life insurance agent will give you the most accurate results, there are a few different methods you can use to get started.
One way to determine the costs you’ll leave behind is through the “DIME” method. DIME stands for:
D - Outstanding Debts
I - Income Replacement
M - Mortality
E - Education
To get an estimate of how much coverage you will need, take some time to list out all of your expenses that fall under these four categories. Debt Outstanding debt can be anything from outstanding student loans, to money you owe on a credit card. You also want to be sure your family can keep their home and stay there for years to come, so be sure to factor in your mortgage into your life insurance estimate. Regardless of how the debt was accumulated, you don’t want these expenses falling on the shoulders of your loved ones. Income How will your absence affect your family’s finances? Income replacement calculates just that—the amount of coverage your loved ones would need to continue living a similar lifestyle. Consider day-to-day living costs, as well as other types of spending, like childcare. And keep in mind that inflation will likely cause costs to increase. Don’t forget to factor in income that comes from any investments, in addition to the income that comes from your job. Mortality The mortality portion of “DIME” covers all final expenses, including funeral costs and other expenditures associated with end-of-life. When estimating final expenses, you may want to leave a little wiggle room for costs that you may not anticipate or be able to determine an exact number for, such as unpaid medical bills. There are also many costs and taxes that come along with settling your estate, so keep that in mind as well. Education If you have children who are in or are planning on going to college, or even a spouse who may want to go back to school, consider the costs of their education when estimating your life insurance policy. Once you add up all of these expenses, you may end up with a pretty big amount. However, there are a few items that you can subtract from this number, such as the amount of coverage on a group life insurance policy, funds from your retirement plan or any other savings you’ve accumulated. In addition to the DIME exercise, there are many online tools you can use to help you estimate your needs. For instance, Life Happens provides a nifty online calculator for estimating these costs. Enter all of your information in the form, and click on the question marks next to each form field for additional tips and information. Once you’ve filled in all of the fields, Life Happens will instantly estimate how much life insurance you need. While the DIME method and Life Happens’ calculator are helpful tools, they cannot replace the knowledgeable insight and helpful advice of an independent insurance agent. An agent will speak with you about all aspects of your life, and work with you to find the right amount of coverage for your specific needs. Call us and get the coverage you need to protect your loved ones’ financial future.