So, you’re thinking about investing in life insurance? Great! Now what? A lot of people have troubling deciding what kind of life insurance policy to opt into and how much of it they need. They think they vaguely know what they want, but when it gets down to the logistics, it can get a little tricky. Just as every person’s personal circumstances are different, their life insurance policies shouldn’t be exactly the same.
First of all, if you have no dependents and enough money saved up to pay for your own funeral expenses, you don’t need life insurance. However, even if you aren’t one of the types of people that absolutely need life insurance, you may still want to look into a life insurance policy so your loved ones aren’t left high and dry if the worst happens.
There are multiple approaches you can take to figure out how much life insurance you need. The more simplistic ones to calculate are often the least thought-out solutions, while the most complicated tactics are often the smartest, especially if you have multiple dependents.
10 times your income
This first tactic is to multiply your income by 10. This excludes a lot of details surrounding your personal situation, such as your current life insurance policies and the amount of money you have in savings. The median income in New York City in 2015 was $60,850. This number will be our jumping point. Following this tactic, 10 times your income would be $608,500.
10 times your income, plus $100k per child
This approach is similar to the one above, but takes your children into account. This extra $100,000 per kid would account for college expenses, which is a very important part of many parents’ life insurance plans. This rule adds more specifics to the “10 times” approach, but it still doesn’t dig deep into your family’s needs and the life insurance coverage you currently have. Following this median income in NYC, for a two-child household, this final outcome would be $608,500 + $200,000 for a total value of $808,500.
The DIME method
This algorithm stands for Debt, Income, Mortgage, and Education, 4 areas that many people consider in deciding how much life insurance they need.
Debt: Add your debt and an estimate of the costs of your funeral. (Mortgage does not count as debt in this situation.) The average funeral nowadays costs over $11,000. If you have $5,000 in credit card debt, this needs to be added in as well.
Income: How many years do you need to support your family? Multiply your salary by that number. Whether this number goes to when your youngest child graduates from high school to when he or she turns 25, this number is a more in-depth look at your income than both of the previous tactics. Let’s take that New York City salary of $60,850 again. If you want to support your family for 6 more years, you’ll multiply $60,850 x 6 for a total of $365,100.
Mortgage: The amount of money you need to pay off your mortgage. The average monthly payment for Americans between the ages of 45-54 years old is $891. Yours could be much higher or much lower than this. Maybe you even paid off your mortgage altogether! Everyone’s number will be different for this depending on how long they’ve owned their home and how much they’ve already paid off.
Education: An estimated cost of what you will pay for your children to attend college. Again, while this is more detailed, it doesn’t consider a few other conditions. The average cost of attending college in the academic year of 2016-2017 was $33,480. If you have two children and want to invest $15,000 per year on each of their educations at four-year colleges, this total cost will be $15,000 x 2 x 4, for a total of $120,000.
Financial obligations, minus assets
Take the outcome you had when you multiplied your income by the amount of years you want your family to be covered (as shown in the Income section above -- at $365,100 with our example), add your mortgage balance, add any other debts you have, add college and funeral expenses. Then subtract liquid assets including your savings, college funds, and current life insurance policy. This is probably the best number, though it takes quite some time to reach this conclusion.
Don’t be stingy when it comes to life insurance. Some insurance companies recommend buying more coverage than you think you’ll need. Having a cushion will make sure that your family will be struck by more than just the tragedy of your loss.
Make sure you speak to your spouse about your life insurance plan to ensure that it makes sense to him or her. In addition, don’t hesitate to reach out to your insurance agents if you have any questions; since life insurance isn’t one-size-fits-all, they’ll be happy to help you.