All of us will pass on, sooner or later. For this reason, you should have adequate life insurance coverage and other resources in place that will provide for those who rely on you for financial support. In case of untimely death, life insurance can pay off your unpaid debts, burial expenses, as well as cover your loved ones’ living expenses. A recent survey by LIMRA found that 44% of U.S. households will fall into hard times six months following the death of the breadwinner, while about 30% of households will start to struggle financially within a month.
Steps to Calculate Your Life Insurance Needs
Step 1
Find out your current financial obligations by adding up the following items:
- Your mortgage balance
- Your annual income multiplied by the number of years for which you intend to replace your income
- All other debts
- Future needs like funeral costs and college fees
- The cost of replacing the services provided by a stay-at-home spouse, if any
Step 2
Find the total of your liquid assets (such as existing college funds, existing life insurance policies, and savings) and subtract it from the total financial obligations as derived in step 1. The final amount obtained is the amount of coverage you need to protect your family adequately.
Other Methods for Calculating Life Insurance Needs
- The DIME formula
This formula enables you to take a thorough, though not comprehensive, look at your financial obligations. DIME denotes, Debt, Income, Mortgage, and Education.
- Final expenses and debt – Add up all debts, except the mortgage, along with an estimate of your funeral costs
- Income – Consider the number of years your loved ones will need financial support and multiply your yearly earnings by that number
- Mortgage – Calculate your mortgage balance
- Education – Estimate your kids’ school and college expenses
By adding up these financial obligations, you can find a relatively well-rounded estimate of your financial obligations. This formula, however, doesn’t account for the financial resources you already have. It also doesn’t account for the stay-at-home parent’s unpaid contributions, such as childcare.
- Multiply your annual income by a factor of 10
The “10 times annual income” rule is sometimes touted online, but it doesn’t account for many of your family’s unique needs as well as your current financial resources like life insurance policies and savings. It also doesn’t include coverage for stay-at-home parents, who need coverage even though they don’t have an income (they likely contribute through unpaid labor, like child care or care for aging parents). In the event you pass on, the stay-at-home spouse may have to pay for these unpaid services.
- Multiply your annual income by a factor of 10 and then add $100,000 for college expenses
This formula adds your kids’ education costs to the “10 times annual income” rule. If you have kids, the cost of their education is a key consideration while calculating your life insurance needs. This method, however, doesn’t incorporate all of your dependent’s needs.
Life Insurance at Donald Weiss Insurance Services
Your earnings, as well as your expenses, will likely increase over time. A life insurance policy can help your ones avoid financial trouble in the unfortunate event of your untimely death. Contact us at Donald Weiss Insurance Services for life insurance coverage that will adequately protect your loved ones.