Life insurance is one of the most effective ways to care for your family after you pass. It’s not a question of whether you need life insurance—it’s how much life insurance you need. Failing to invest in enough life insurance won’t help your family once you die. This post from our team will teach you the best methods for calculating life insurance needs.
How much life insurance do I need?
Calculating life insurance isn’t as complicated as you might think. In fact, all you need to do is subtract your existing assets from your likely financial obligations after you pass. Here are financial obligations you may need to cover:
- Income replacement: Multiply your salary by the number of years you want to cover your family. You’ll want this income replacement to include all current and future expenses. You may need to add a little extra if your spouse doesn’t currently bring in any money.
- Mortgage: Assuming you want your family to live without fear of losing the house, be sure to add your monthly mortgage into your calculations. You can skip this step if you have already factored the mortgage in with your income replacement.
- Large debts: Do you have large amounts of credit card debt or other high monthly bills? If your family would struggle to make those payments after you pass, be sure to add them in with your calculation.
- College tuition: If your children are planning on going to college and you’d like to help pay, consider their tuition when calculating your life insurance needs. Keep in mind that college tuition seems to get a little more expensive each year.
- Funeral expenses: Paying for funeral and burial expenses is the number one reason people buy life insurance. With the average cost of a funeral coming in at over $7,000, this fact makes sense. You can also consider getting burial insurance if you don’t want to add more to your current life insurance policy.
Other ways to calculate life insurance needs
The formula mentioned above is the easiest way to determine how much life insurance you need, but you can also multiply your income by 10 or use the DIME method.
Multiplying your income can get you close to the amount of insurance you’ll need, but it doesn’t consider all of your expenses. By only multiplying your income, you might not end up with enough insurance to protect your family.
The DIME method stands for “debt, income, mortgage and education.” Add these figures to determine how much life insurance you need. The biggest flaw with this method is that it doesn’t account for your existing assets, so you might end up over-insured.
See what our team can do for you
As you can see, calculating life insurance doesn’t have to be the hardest thing in the world, but you could still use a helping hand to get you through the process to ensure you’re set up to protect your loved ones to the fullest extent possible. Contact Safe Path Financial today to learn about all of your life insurance options.