Before deciding which policy is right for you, you must first determine how much life insurance coverage you need. Whether you are looking to replace your income or simply leave a legacy for your loved ones, it’s essential to understand your current financial situation and know your goals for what you want your policy to cover.
Factors to Consider When Calculating How Much Life Insurance Coverage You Need
How Much Coverage You Already Have
It’s important to know how much you already have in coverage when calculating your insurance needs. Most companies offer a group life insurance policy that provides an average of $10,000 in coverage. If you are unsure what your company offers, check with your employer.
You’ll also want to total up all other assets, such as your 401k, annuity, and any stocks or bonds that you own. Make sure to only account for their current value should the unexpected happen.
When you have totaled up your assets, you will take this amount and subtract it from your overall insurance needs. This way, you can ensure that you only pay for what you need.
What You Are Trying to Replace in Income
If you are still currently employed and you or your loved ones depend on that income, you will want to buy a policy that can act as income replacement. You will need to think about how many years your family will need this income. One guideline you will find online is to take your current income and multiply it by 10. This method will give your family ten years of income replacement. The only problem with this method is that it doesn’t consider possible future raises and the cost of inflation. It is, however, a good starting point when determining your needs.
How Much You Need to Cover Your Debt
Covering personal debt is one of the driving factors for obtaining a life insurance policy. The last thing you want is to burden your loved ones with outstanding accounts. Although some forms of debt may not fall to your family to cover, they will go to your estate. That means less money for burial costs and additional funds to help with daily expenses. Total up all your accounts, including credit cards, mortgage, student loans, and personal loans.
What You Need for Final Expenses
Experts say a traditional burial will cost you around $8,000-$10,000 and this does not include flowers or an obituary. Other burial options, such as cremation, will cost you less, so it is essential to decide what burial option is best for you and ensure that your loved ones know your wishes. Consider adding this to your final will, so there is no confusion.
While pricey, a funeral isn’t the only final expense you need to consider. There will likely be medical bills that need to be covered as well. The Federal Reserve Bank of Richmond estimates that out-of-pocket medical costs average close to $10,000 per individual in their final year of life. Specific disease processes like cancer and dementia have a much higher out-of-pocket expenses. While it may be impossible to account for every medical expense, it is a good idea to have some of your policies dedicated to covering these costs.
Your Legacy Goals
Once you have covered all of the basics like funeral expenses, debts, and income replacement, consider how much you would like to leave behind for your family. Do you have children or grandchildren you want to send to college? Do you have a partner whose retirement you would like to cover? Calculate how much would be needed to achieve this and find an insurance policy that can help.
Use the DIME Formula
The DIME formula assists you in determining how much life insurance coverage you need. DIME stands for debt, income, mortgage, and education. When you have added all of these areas together, you get a pretty good idea of your individual insurance needs.
- Debt – the total amount of debt you owe, excluding mortgage
- Income – your total income multiplied by the number of years you wish to replace it
- Mortgage – how much you still owe on your mortgage
- Education – education costs for your children or grandchildren
Ask an Agent at Americo Senior Life
If you’re over 50 and in the market for life insurance, Americo Senior Life is here to help. Your rates will never increase with our whole life insurance policy, and your coverage will never expire, as long as your premiums are paid on time. Contact us today, or go online now for your free quote!