A big question when it comes to life insurance is “How much coverage do I need?” Of course, this depends, but generally, you want enough life insurance coverage to cover your financial obligations and outstanding debts. In this post, we’ll review some best practices for figuring out how much coverage is right for you, considerations to make, and how you can get started with Policygenius’ easy-to-use life insurance calculator.
The life insurance rule of thumb
There is no one-size-fits-all approach when it comes to life insurance. The amount of coverage you need will depend on your personal and financial circumstances, as well as your dependents and their current and anticipated expenses. The most straightforward way to determine how much life insurance you need is by summing up your financial obligations and subtracting any liquid assets.
It’s often recommended that people aim for life insurance coverage that is 10 to 15 times their income. This amount should cover average household expenses, inflation, and market returns.
The DIME method offers a simple way to estimate how much life insurance you should purchase. DIME stands for Debt, Income, Mortgage, and Education. To use this method to determine how much coverage you will need, you need to tally up the following:
- All outstanding debts
- Your income multiplied by the number of years your family/dependents will rely on it
- How much is left on your mortgage
- Education costs of your children
Add these numbers up and they will give you a rough total of how much life insurance you may need. The DIME method can give you a good starting point but doesn’t take personal considerations, end-of-life expenses, or resources you already have into account.
Health and age
One of the most obvious considerations to make when shopping for a life insurance policy is your health and age. These will help determine how much insurance you should buy and how long the coverage should last. Naturally, the older you are, the less coverage you will most likely need, as you’re more likely to have less debt and fewer dependents.
Having dependents can be very expensive and can significantly increase the level of coverage you may need. Whether you are responsible for aging parents, are a parent yourself, or are expecting, these dependents must factor in to your total life insurance coverage.
College education can be a significant expense. For parents who plan to foot the bill for their children’s future college education, it’s important to include this expense in your decision-making process as you shop for life insurance. This requires not only tuition but room and board and living expenses.
At an average cost of $8,000 to $10,000, the last thing you want your loved ones to worry about when you pass is covering funeral expenses. Oftentimes, policyholders include these end-of-life expenses into their life insurance coverage to ensure that their families don’t have to bear the burden while they’re already navigating a difficult time.
Everyday living expenses, such as housing, groceries, bills, clothing, entertainment, etc. should all factor in to your life insurance policy. Over time, the cost of living will vary based on inflation, your number of dependents, and salary changes. Because of this, it’s best to use an estimated average cost you would spend over the duration of your policy to account for these fluctuations.
Trying to come up with a hard number can be overwhelming. Fortunately, Policygenius offers a free, easy-to-use life insurance coverage calculator that aims to make it easy to estimate how much life insurance you need and how long the coverage should last.
Once you know how much life insurance you need, you can begin to shop for coverage. Policygenius makes this process easy, simply:
- Enter your zip code
- Fill out your details
- Browse obligation-free personalized quotes from top insurers
When it comes to shopping for life insurance, determining how much you need can be the most overwhelming but most important step towards protecting your family’s future. With the right amount of coverage and policy length, you can enjoy peace of mind knowing that your loved ones are taken care of.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, financial advice. Reasonable efforts are made to maintain accurate information. However, all information is presented without warranty. MicroVentures may be compensated if you apply for and receive a product or service from a third party mentioned or hyperlinked on our website. Regardless of whether you elect to purchase a service or product mentioned or hyperlinked on our website or directly from a third-party company, please review and verify all information provided during an application or sales process.