How Much Life Insurance Do You Need

You can find the ideal amount of ‘life insurance’ policy by calculating the ‘long-term’ financial obligations followed by subtracting the assets from it. The ‘remainder’ is the gap which the ‘life insurance’ would fill. It could be hard to know what should be included in the calculations. 

Here are some popular ‘thumb rules’ that can be helped to determine the right amount of coverage.

Thumb Rule No.1: Income Multiplication by 10

The 10 times ‘income rule’ does not take into account the requirements of a family, your current ‘life insurance’ policies and your savings. It neither provides the ‘coverage amount’ for the ‘stay-at-home’ parents. You can apply this rule only if both the parents are insured.

Thumb Rule No.2: Income Multiplication by 10+ $100,000 for every child for the college expenses

If you have children, including the education expenses in the calculation of life insurance is essential. This thumb rule does not take into account the requirements of your family, assets or the coverage of life insurance.

Thumb Rule No.3: The ‘Dime Formula’

This formula takes into account education, mortgage, income, and debt. Thus when you are calculating the ‘life insurance’ requirements, you need to consider the four aspects.

• Debt as well as Final Expenses: You need to add the debts, estimation of the funeral expenses and the mortgage.
• Income: First of all, you need to calculate the number of years your family needs support. You need to multiply this number with your annual income. The multiplier should be the ‘number of years’ before the youngest child in the family graduates from the high school. You could make use of this calculator for computing the income replacement requirements.
• Mortgage: You need to calculate the required amount for paying off your mortgage.

• Education: This is the cost of the college education of your children. It is a comprehensive formula and does not consider the savings and the ‘life insurance coverage’ you have. It does not take into account the ‘unpaid contributions’ the ‘stay-at-home’ parents make.

How to Calculate the ‘Target Coverage’ Amount?

The amount for ‘target amount’ is the difference between the liquid assets and the financial obligations.

• First Step: The first step is the calculation of the obligations. You have to add the annual salary (multiplied by the ‘number of years’ you intend to substitute the income)+ the mortgage balance+ the other debts+ funeral and college costs. In case you are a ‘stay-at-home’ parent you have to take into account the cost for replacing the services that you offer, like child care.

• Second Step: The second step is the subtraction of the liquid assets that includes the present college funds, savings, and the present life insurance.

Tips To Keep In Mind While Calculating the Coverage Requirements

• Instead of buying the ‘life insurance’ in isolation, consider purchasing it as a part of the general financial plan. The plan must consider your future expenses like the growth of growing assets or income, college costs, etc.

• It is better to buy more coverage than you need instead of buying less.

With the help of above-mentioned points, now it is easy for you to make the right pick.