As with any insurance, buying life insurance will mislead you:
You want to make sure you have enough coverage to protect your family and loved ones in case you die, but you don’t want to play it in order to sure the monthly premiums are beyond your budget.
Unfortunately, we cannot tell you exactly how much life insurance you will need. This number is yours and your family’s and is different for everyone.
But we can help you find out for yourself.
4 questions you need to ask to determine how much life insurance you need
Ask yourself these questions to determine if you need life insurance and how much coverage to buy.
1. Are you a parent?
Having children is one of the most common forces that lead people to buy life insurance. That makes sense: your children depend on you for everything. So you want to make sure that you are financially safe in case you die.
Even if you are part of a two-parent household where your family doesn’t depend on your income (or you don’t earn income), you should consider taking out life insurance.
Life insurance can help cover the costs your family suddenly faces in your absence, such as: B. Childcare, housework or maintenance. These costs can fluctuate significantly if the other parent has to change jobs or make other lifestyle adjustments once you are gone.
Life insurance with benefits that you leave your children with can help them graduate from college. This can be especially helpful if you have other plans to cover your school or living expenses during school hours.
To include children in your coverage, consider the following:
- How many children or other dependents does your household support?
- For what current costs does your family depend on your income?
- What, besides money, do you contribute to the household that would mean new costs for your family if you were away?
- What future costs do you plan to cover for your children?
2. Is anyone else relying on your income?
Whether or not you have children, are you in a relationship where the other person depends on your income?
Perhaps you earn 100% or most of your household income for yourself and a spouse or partner. Perhaps you are supporting an older parent or a relative with a disability. Perhaps you have a unique financial arrangement with a roommate, friend, or sugar baby.
Whoever it is, what would these people lose financially if you died?
Take into account their current and future costs, including:
- Housing and living expenses
- Health insurance and health care
- Assisted living facilities
- domestic care
3. What lasting costs will you leave behind?
In addition to the basic cost of living, what are the costs that you leave to your family when you die? The most common costs to consider are:
- Funeral expenses. What kind of ceremony, memorial, funeral, or other tradition will your family expect when you die? Regardless of other financial obligations, many people buy life insurance to cover these costs.
- Mortgage. If you share a mortgage with someone else, they will remain responsible for paying back the balance of the mortgage even if you die. With the loss of your financial or domestic support, life insurance could protect you from being burdened with that debt.
- Credit card debt. Do you share credit cards with someone else? Just like mortgage debt, they will undertake this repayment without you.
- Student Loans. When you repay federal student loans or a parent PLUS loan for your children, the government will Discharge those student loans when you die. However, some private lenders are not that lenient and sensible. Something do Loans provide relief in the event the borrower dies, but some do not. You could try to collect the debt from a co-signer (if you have one) or from your estate, which would result in an inheritance that your family receives. Student loan debt becomes Not transmitted directly to your survivors.
- Personal Loans. Personal loans work like private student loans when you die. A co-borrower remains responsible for the debt. In the absence of another borrower, the lender will get what they can back from your estate.
- Taxes. Your beneficiaries will have to pay estate tax if they receive a large inheritance on your death. The estate tax threshold for 2021 is $ 11.7 million. Perhaps many of us are not worried about this. BUT your loved ones could get taxes on forgiven debts they shared – a little much more from us, probably should think about.
If you can, get adequate life insurance to cover these costs for your beneficiaries. If you cannot afford adequate coverage, or do not qualify for adequate coverage, then at least consider the monthly cost of that debt when calculating how much runway to provide.
Entrepreneur, you have to think about more than just your family when considering life insurance.
If without you your business stopped working or would have to be sold to cover debt and other costs, consider the impact it will have on your employees.
Get adequate life insurance to cover your personal and business debts and to protect your business. And for small businesses, you can designate your employees as beneficiaries to give them a financial cushion in case the business is suddenly pulled out from among them.
4. What is your annual income?
Income replacement is one of the biggest factors most people consider when trying to figure out how much life insurance to buy. Calculate your annual income multiplied by the number of runway years you want to leave your family with.
When you start replacing your annual income, you will get a good basic understanding of how much coverage your beneficiaries may need. But don’t stop there.
Keep the above factors in mind – your family’s financial situation and needs are likely to change after you die.
Also, you may want to create a plan that will prepare them for long-term financial success rather than just helping them survive the immediate aftermath of your death.
The DIME life insurance formula
How much life insurance they The need to leave loved ones is completely subjective – but experts love to create a formula for everything so we can’t leave this out.
For years, financial advisors have recommended a simple formula, “Annual Income X 10”, for life insurance coverage. Until they realized that all people are unique and have a wide range of life insurance needs. And that people who do not earn an income still make a valuable contribution to the household.
The DIME formula offers more leeway for what is actually going on in your life. It’s imperfect, but at least the acronym is easy to remember. It is:
- Debt: The amount of your non-mortgage-surviving debt and funeral expenses.
- Income: Your annual income and / or your unpaid household contribution multiplied by the number of years that the death benefit is intended to support your family.
- Mortgage: Your outstanding split mortgage debt.
- Education: The estimated cost of your children’s K-12 and higher education.
Example of a life insurance
Let’s look at a hypothesis to see how you can calculate the amount of life insurance coverage you need.
Kris and Sam, both 35 years old, are married with two children, ages 2 and 3. They both own a house and share a mortgage with a remainder of $ 100,000. Sam has a student loan debt of $ 25,000 and the couple have a joint credit card debt of $ 10,000. Sam makes $ 75,000 a year and Kris stays home with the kids.
At their age, Kris and Sam could each be eligible for fairly low life insurance prices, so this is a good time to buy one.
Given their young loved ones, they might consider 20 years each Term life insurance, a common guideline for parents to provide affordable protection for their children throughout their childhood.
How Much Life Insurance Do You Need? Sam should consider term life insurance with:
- $ 100,000 + to pay off the mortgage balance and interest.
- $ 10,000 + to pay off your credit card debt and interest.
- $ 75,000 x 10 years for income replacement.
- $ 6,000 / year x 3-5 years for Childcare costs.
- $ 2,000-10,000 for Funeral expenses.
- $ 100,000 x 2 for their children’s education.
Sam would need a policy with about $ 1 million to $ 1.5 million coverage.
That may sound like a lot, but it doesn’t have to be expensive. A lot of Life insurance company Make it easy for yourself to sign up for life insurance online and get that amount of coverage for less than $ 20 per month while you are young and healthy.
Kris’s life insurance would likely be lower, but not a amount lower. While Kris has no income to replace, Sam would likely pay for childcare and other new expenses if Kris died.
You can find more scenarios and unexpected considerations about life insurance in our post at three types of people who need life insurance (and five who don’t).
Dana Sitar (@danasitar) has been writing and editing on personal finance, careers, and digital media since 2011.
This article originally appeared on www.thepennyhoarder.com