Nothing can fully protect your family and loved ones from the unexpected. But life insurance is among the best ways to help the people you love get back on their feet more quickly when you’re no longer able to provide for them. A life insurance policy can present your family with the financial support necessary to settle your debts, pay for funeral arrangements or care, execute any requests and even set up a future inheritance. Optional riders can provide additional peace of mind, allowing you to enhance your policy to cover specific anticipated needs. That way, your loved ones can more easily focus on healing and life without you.
Find the Best Life Insurance
Enter your ZIP code below and be sure to click at least 2-3 companies to find the very best rate.
Rule of thumb No. 1: Multiply your income by 10.
“It’s not a bad rule, but based on our economy today and interest rates, it’s an outdated rule,” says Marvin Feldman, president and CEO of insurance industry group Life Happens.
The “10 times income” rule doesn’t take a detailed look at your family’s needs, nor does it take into account your savings or existing life insurance policies. And it doesn’t provide a coverage amount for stay-at-home parents.
Both parents should be insured. That’s because the value provided by the stay-at-home parent needs to be replaced if he or she dies. At a bare minimum, the remaining parent would have to pay someone to provide the services, such as child care, that the stay-at-home parent provided for free.
Rule of thumb No. 2: Buy 10 times your income, plus $100,000 per child for college expenses
Education expenses are an important component of your life insurance calculation if you have kids. This formula adds another layer to the “10 times income” rule, but it still doesn’t take a deep look at all of your family’s needs, assets or any life insurance coverage already in place.
Rule of thumb No. 3: The DIME formula
This formula encourages you to take a more detailed look at your finances than the other two. DIME stands for debt, income, mortgage and education, four areas that you should consider when calculating your life insurance needs.
Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
Income: Decide for how many years your family would need support, and multiply your annual income by that number. The multiplier might be the number of years before your youngest child graduates from high school. Use this calculator to compute your income replacement needs:
Mortgage: Calculate the amount you need to pay off your mortgage.
Education: Estimate the cost of sending your kids to college.
The formula is more comprehensive, but it doesn’t account for the life insurance coverage and savings you already have, and it doesn’t consider the unpaid contributions a stay-at-home parent makes.
How to find your best number
Follow this general philosophy to find your own target coverage amount: financial obligations minus liquid assets.
- Calculate obligations: Add your annual salary (times the number of years that you want to replace income) + your mortgage balance + your other debts + future needs such as college and funeral costs. If you’re a stay-at-home parent, include the cost to replace the services that you provide, such as child care.
- From that, subtract liquid assets such as: savings + existing college funds + current life insurance.