How Much Life Insurance Coverage Should I Purchase?

Purchasing life insurance is something many of us try to avoid. Some steer clear of the subject, assuming it’s too expensive to fit into their budget. Others just don’t want to disrupt their day with such morbid thoughts. Particularly when it comes to placing a value on their own life.

While it feels morbid, investing in life insurance has a multitude of advantages. The most important being the peace of mind of knowing your family is protected in the event of your death. But, how can you possibly place value on a human life? The reality is, every life is important and no amount of money can replace a human life. There are, however, a number of tips you can apply when determining the face value of your life insurance policy.

Realizing Your Human Life Value

The primary goal of your insurance policy is to provide for your family when you’re no longer there to do so. There are a number of factors included in the human life value equation, including occupation, age, income, number of children, and employer benefits. Let’s take a closer look at these components.

Income

It’s been a long-standing rule to multiply your income times ten when determining your life value. While this might be a great place to start, your age should be factored into this equation.

For example, a 72 year old will likely need less than a 40 year old. The 72 year old typically has less expenses, is nearing the end of his/her career, and has children grown and out of the household. They could probably get by with 4-10 times their annual income. Whereas the 40 year old has a number of years left in their career, has younger children at home, and still has many years left on their mortgage. When determining policy amount, this individual should consider 14-20 times their annual income.

It’s also important to remember that both spouses add value to the household. Many consumers feel they can get by with skipping an insurance policy for the homemaker. But think about all the your spouse does each day to ensure the house runs smoothly. Who will provide those services when they’re gone? Consider each of these services and how much it would cost to hire someone to perform them on an annual basis. You’d be surprised at how quickly the expenses add up.

The DIME Formula: A More Detailed Approach

The DIME formula prompts you to consider all the details of your financial situation. It stands for debt, income, mortgage and education.

• Debt and final expenses: Conduct research regarding the current cost of funeral expenses. Add that to your total debt, with the exception of your mortgage.
• Income: How many years would your family need financial support if you were to die unexpectedly? Multiply your annual income by that number.
• Mortgage: What is the current balance on your mortgage?
• Education: How many children do you have? What would be the total cost of a college education for each child?

While the DIME formula is more comprehensive than the first two life value options, it doesn’t take into consideration any savings, assets, or the unpaid contributions of a spouse that stays at home. If you’re looking for a more precise number, consider the following formula.

1. Annual salary (times the number of years you’ll need to replace) + mortgage balance + other unpaid debt + funeral expenses + college education for children + cost of replacement services for stay-at-home spouse
2. Total from #1 – savings – existing college fund accounts – additional assets – current life insurance

Determining the amount of life insurance necessary to support your family is a task no one finds pleasant. There’s no way of knowing exactly how much insurance would support your family properly. If you come up with a number and it’s lower than what you expected, go with the larger amount. Term life insurance policies are very affordable; adding a bit more to the policy’s face value will save you peace of mind, while barely making a dent in your budget.

Still not sure how much coverage is enough? Stay tuned – our next ebook will go into more depth regarding the amount and type of coverage that’s best for you and your family.