It is not only important to have life insurance but also to have sufficient coverage.
Millions of North Americans currently have life insurance, however, 70% are unsure whether they have enough to cover their family.
So, when looking to get life insurance, you need to carefully consider the amount of coverage you require.
We will now take a closer look at the numerous factors that affect this figure as well as what you should pay attention to when purchasing life insurance.
How much is required?
Every family is different, so you should get insurance that suits your needs. No one type is suitable for everyone. However, three rules can help you figure out how much coverage is enough for you and your family.
With that said, these rules don’t consider everything, such as your current savings. Be sure to check out an online life insurance needs calculator so that you can determine how much life insurance you need and compare it to the estimates you actually get.
Rule 1: Take your yearly income and multiply it by 10. Multiply by five if you need to stay within a tight budget.
This is one of the easiest ways to determine how much life insurance you may need. However, it is not a perfect method and doesn’t consider all the needs of your family, your current savings, etc.
Additionally, it may not be good for someone who stays at home as a parent. They require life insurance in the same way as another person who works, even if they don’t have a salary. In the event that the stay-at-home parent dies, their partner will have to hire someone to do everything that the deceased used to do.
If you can’t determine the amount of life insurance you may require, it is certainly a good idea to talk to an insurance agent.
Rule 2: Your annual income x 10. Then, add $10,000 for every child that you have to cover the cost of university.
If you have kids or want to have them, you need to factor in the cost of their tuition. However, this rule isn’t one size fits all, and you still need to consider everything your family requires, how much money or assets you have, etc.
Rule 3: DIME
The DIME formula is the most detailed compared to all of the three rules. This formula covers the most important areas of your life, including education, income, debt, and mortgage.
Debt: This refers to the amount of debt that you will leave your family in the event of your death. This is any type of debt that won’t end with your death. It can include credit card loans, student loans, etc.
Mortgage: When you die, your mortgage won’t just disappear. So, you need to add this to your life insurance coverage.
Income: Think about how long your family would require financial assistance. Then, take this number and multiply it by your income.
Education: Consider the amount of money that all of your children will require to get a degree.
Using the DIME formula is an excellent way to figure out how much life insurance you may need. However, it still doesn’t take into consideration your savings, assets as well as the cost to cover a stay-at-home parent’s services which are provided for free.
Extra guidelines for determining how much life insurance you would require:
If you have a special needs child, then you should think about getting permanent life insurance. This will ensure that your family gets the benefit no matter when you die. Do note that term life insurance doesn’t provide this type of guarantee.
If you want to get life insurance to take care of your expenses at the end of your life, then you don’t need to think about your expenses, debt, etc. You can simply get a basic life insurance plan.
You should avoid trying to pay the least possible on life insurance. Instead, you should strive to get a bit more coverage than what may be needed. It is much wiser to leave more money than less for your family.
What can you use life insurance for?
The majority of people get a life insurance plan that is between 10 and 15 times their yearly salary or income. This will enable the following expenses to be covered:
Daily expenses and bills
When life insurance is paid, it should be sufficient to cover everyday expenses and bills such as food, rent, mortgage, clothing, medication, utility bills, and more. It will help your family to continue functioning at their current standard of living. This will help them to avoid worrying about money.
Once you have any long-term debt, it won’t end when you die. An example of this type of debt is your mortgage. So, once you die, your family will need to continue paying your mortgage. However, without your salary, it will likely be very difficult for them to pay it. Getting life insurance, can help to pay off this mortgage or any other long-term debt you may have. It will go a long way in preventing your family from going through financial difficulties after your death.
Another benefit of a life insurance payout is that it can help pay for childcare. This includes not only the daily needs of the child but also tuition, college costs, after-school lessons, etc. Be sure to consider the rising cost of tuition.
Cost of the funeral
Unfortunately, it is quite costly to die. There are many costs associated with having a funeral, such as purchasing headstones, coffins, cremation fees, etc. A funeral can easily cost many thousands of dollars. In the US, a funeral can easily cost between $5,000 – $15,000. So, if you want to save your family from the financial distress of handling your funeral, then you should consider it in your life insurance coverage.
What else needs to be considered?
Is it best to get the biggest life insurance coverage possible?
The bigger the death benefit, the more you will have to pay your monthly premiums. Most people want to leave as much money as possible for their families. However, you need to consider what you can afford. If you can’t afford to pay the monthly premium on a $5 million policy, then it makes no sense to try to do so. This is because, at some point, you will start to miss your payments which will cause issues with your policy. This is something you need to avoid.
You should choose a life insurance policy that works for your family and is also financially possible in your budget. You can ask your beneficiaries how they would use the money in order to decide how much life insurance you’ll require.
After your death, the insurance company would pay out the benefit to your beneficiaries and they can use this money in any way that they desire. It can be used to cover daily expenses, pay off debt, etc. It can even be used for education, charity, and more. There isn’t one particular way that the benefit should be used.
With that said, you should talk to your family about how they would like to use the death benefit. This will help you to figure out how much life insurance you should get. Once you have an idea of this, you should request a couple of life insurance quotations from various companies.
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