Start by calculating your long-term financial debts, then subtract your assets. What’s left is the gap that life insurance will have to fill.
You can’t identify the perfect amount of life insurance you should purchase. But you can calculate if you think about your current financial situation and imagine what your family will need in the coming years.
Usually, you should find your perfect life insurance policy quantity by calculating your long-term financial liability and then take off your benefit. The number is the hole that life insurance will have to fill out. But it can be hard to realize what to incorporate in your estimations, so there are various fully circulated rules meant to help you decide the right coverage number. Here is a couple of them.
“It’s not a bad rule, but based on our economy and interest rates, it’s an outdated rule,” says Marvin Feldman, president, and CEO of Life Happens.
The “10 times income” rule doesn’t take a full look at your loved one’s needs, neither does it take into financial record or actual life insurance policies. And it doesn’t offer a protection quantity for homelike parents.
Both parents should be insurant, Feldman says. That’s because the value provided by homelike parent needs to be returned if he or she dies. At a minimum, the other parent would have to pay somebody to deliver the services, such as childcare, that the homelike parent supplied for free.
Add $100,000 per child for college expenses.
Education costs are an essential 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 full look at all of your family’s needs or any life insurance coverage already in place.
This method helps you to take a complete look at your finances than the other two. DIME is for debt, income, mortgage, and education, four areas that you should think when calculating your life insurance needs.
The formula is complete, but it doesn’t consider for the life insurance protection and savings you already have, and it doesn’t admit the outstanding benefactions a homelike parent makes.
Support this global basis to see your target coverage amount: financial obligations minus liquid assets.
Calculate debts: Add your annual salaries (times the number of years that you want to replace income) + your mortgage balance + your other liabilities + future needs such as college and funeral costs. If you’re a homelike parent, include the cost to return the services that you provide, such as childcare.
From that, deduct liquid assets such as profits+ existing university funds + general life insurance.
Have these tips in mind as you estimate your coverage requires: