How to Calculate Your Life Insurance Needs
March 16, 2023
Before securing a plan, you must know precisely how to calculate your life insurance needs. One of the biggest challenges when buying life insurance is determining the proper death benefit. Calculating your insurance coverage needs can feel complicated, especially the first time. Determining how much coverage you need can be easier than you think.
The Four Ways to Calculate Your Life Insurance Needs
There are four ways that you can consider to help you choose the death benefit that’s right for your situation.
Life Insurance Coverage Valued at 10 Times Your Income
Multiplying your annual income by ten is sometimes the easiest method of choosing your coverage amount. For example, earning $75,000 per year, you would select a policy with a death benefit of $750,000. While this is the fastest and simplest solution, you may need extra life insurance to cover necessities. For example, it may not provide enough to cover your outstanding mortgage, the cost of child care, or any education funds you want for your children.
Life Coverage Valued at More Than 10 Times Your Income
If you like the simplicity of multiplying your income but find 10 times your income insufficient, you can opt to multiply your annual income by any number that suits your needs. Whether you choose 15 or 20 times your annual income, consider how many years of your earnings you want for your loved ones.
Life Policies Valued at 10 Times Your Income Plus More
When the basic life insurance calculations of 10 times your income are insufficient but you need help deciding on a multiplication factor, consider using 10 times your income as a base number and simply adding to it. For example, if 10 times your income is $750,000, you could start with that and add any other amount you feel is necessary. For example, add $75,000 to cover your child’s college expenses and an additional amount to pay off your mortgage and any debts.
Life Insurance Requirements Based on Actual Needs
Although it means doing more math, calculating your actual needs using the DIME method can give you greater peace of mind.
- Debts: Start with an anticipated amount for your outstanding debts, including any loans, credit cards, and funeral expenses. Add some to cover medical costs if you anticipate medical insurance shortfalls, too.
- Income: Decide how many years of your income you wish to replace for your loved ones and multiply your annual salary by that. Add the total to your death benefit amount.
- Mortgage: Add the remaining balance of your mortgage so that your loved ones do not need to make that payment.
- Education: Include a flat rate for your children’s education if you want to pay for a college fund.
Add all of this together to determine the most accurate death benefit amount possible for your policy.
Consider Your Life Insurance Options
After thinking about the coverage you need, consider whether you want a whole-life policy that might gain cash value over time. Likewise, you may consider a term life insurance policy that pays out if you pass away during the policy period. Your budget and your preferences determine which is the best solution.
About 1891 Financial Life
At 1891 Financial Life we don’t just sell policies, we offer possibilities. We pride ourselves on giving back to the communities that we serve by providing quality and comprehensive insurance solutions. We are a not-for-profit life insurance Society, which means the sales from these financial service products help fund member benefits along with social, educational, and volunteer programs designed to respond to community needs.
Our portfolio is extensive, ranging from various life insurance policies to our annuities to support your financial needs no matter what stage of life you’re in.