Nobody likes to talk about the inevitable. Death is a natural part of life, so you must be prepared for it. For many reasons, the earlier you start preparing for it, the better off you are. First off, it will be cheaper when you are younger. Second, you never know when something terrible might happen to you, so it is best to be ready for it. Just think like you are in one of the Final Destination movies and be prepared for anything at any time.
With that being said, let’s look at how much life insurance you need compared to how much you want.
- Finances – You need to take the time to analyze your finances. You will need to use one of the available online calculators, or you can get the old calculator out and figure things out for yourself. Here are the steps you will need to take to do it yourself.
- Take your annual salary and multiply it by the number of years that you want the policy to cover. For example: $50,000 salary X 2 years = $100,000.
- Now take your mortgage balance. Let’s say you have $250,000 left to pay off.
- Add up all your other debts. Let’s round this up to make it easy and say that you are in the whole $10,000.
- Add in the costs of any future payments you need to make, such as funeral costs and covering your daughter’s wedding. Let’s say another $25,000.
- Add in any other services or bills that you want to cover. Let’s leave this at 0.
- Add your totals together and subtract the amount of savings and other life insurance policies that you have. Let’s say you need $385,000, but you have $100,000 in assets, and that would mean that you want a life insurance policy of at least $285,000.
- Estimate What You May Need – There are some ways to go around the mathematical formulas above, and they are just as good.
- Take your annual income and multiply it by 10. So $50,000 X 10 = $500,00. So, in this case, you would want to know how much life insurance is to cover this amount.
- Another way is to multiply your annual income by 10 and then add $100,000 per child to help cover the cost of college. So you would have $50,000 X 10 = $500,000 + $200,000 (2 kids) which means that you need a policy that covers at least $700,000.
- Use the DIME principal, adding your debt and funeral expenses + Income + Mortgage + Education. So you would have $35,000 + $50,000 + $250,000 + $200,000 which gives you a total of $535,000. This is the minimum amount that your policy needs to pay out.
Figuring out how much you need to set aside for your life insurance is that simple. There is no need to be exact on the mathematics because the policy amounts you can get will be exact amounts for the money they have set up. It may seem a bit complicated at first, but once you plug your numbers into the examples above, you will figure it out.
Just make sure that you do not skimp on the policy. It is always better to get more than you need because you may have missed a bill here and there or underestimated the cost of college for one of the kids.
The bottom line is to figure out what you need according to the formula you use and then go up to the next level of policy. Just to ensure your loved ones are secure and do not have to dig into their pockets after you are gone.