How do you know how much life insurance coverage you need?
Every person who has dependents, has debt, or carries a mortgage should consider protecting themselves and the ones they love with life insurance. However, each of us leads a different life, and we all have different needs – so how does a person figure out the right amount of coverage for themselves?
There are several ways to calculate how much life insurance a person may want to carry, and using the DIME method is a good place to start. DIME stands for Debt, Income, Mortgage, and Education. If you still don’t carry life insurance, or if you are worried that you may not have as much as you need, take a look at these four areas in your own life to get a rough idea of your ideal coverage.
Debt – Add together all of your debts (except for any mortgages) and include end-of-life costs to cover your funeral and similar expenses.
Income – Take your total yearly income (or an average of several years) and multiply it by the number of years you want to support your family or other dependents.
Mortgage – If you carry a mortgage, add in the total amount you need to pay it off completely.
Education – If you have children, estimate how much it will cost to pay for their college education as well as any primary education expenses. Be sure to consider tuition inflation while you calculate.
Once you add these categories together, you’ll have a basic understanding of the coverage you need to provide for the ones you love and enjoy the peace of mind that comes from strong preparation.
If you want to get further into planning for retirement using life insurance, let’s sit down and form a plan.