How Much Life Insurance Do You Need?

How Much Life Insurance Do You Need?

We don’t plan the financial security of our families until we experience uncertainties. Death is inevitable. While nobody likes to dwell on it, it is important to think about the financial security of your dependants at a young age. 

If you are a sole earner in your family, you need to invest in life insurance to ensure that your family is financially stable when you are not with them. The life insurance policy can pay for your burial and funeral arrangements and help your family meet their financial needs after your death. 

When buying life insurance, read the policy carefully to see if it covers all your financial needs. The coverage needs vary for every individual. If you have only one dependant and no mortgage, an average term life insurance will do. Likewise, you need more coverage if you have 3-4 dependants.

Types of Life Insurance

Term life insurance and whole life insurance are the two most popular options for homeowners looking for a policy that offers the best death benefit. A whole life policy is a kind of permanent life insurance that never expires. It differs from the term insurance in that it provides the beneficiaries with some cash value, other than the death benefit.

On the other hand, term insurance is signed for a specific period. The policy can expire in the next 10-20 years from the date of purchase. You can renew the contract after expiration. 

Whole life insurance is better, but it is relatively more expensive than term insurance. 

The cost of life insurance policies can vary depending on the insurance provider you choose and at what age you buy the coverage. 

Note that the price for the insurance policy will be higher for older people, especially those who develop a chronic medical disease. It’s better to lock in the coverage at a young age (preferably in your 30s).

How to Calculate the Ideal Life Insurance Coverage?

A random estimate will not work when it comes to a life insurance policy. You must consider your current health, financial obligations, income, and future financial needs before making a decision. Let’s check out a few tips for calculating the ideal amount of health insurance.

10 Times Your Income

Every individual applying for health insurance (term or whole policy) should strive to secure a deal that pays them 10 times their income. That’s a minimum, though. The ideal coverage amount is 20 times your income, especially if you buy the policy at a young age. Your income will go up from here, and so will your financial obligations. Children’s education, weddings, healthcare expenses, debt payments, etc., can take a toll on your financial health. 

An individual making $30,000 a year should sign up for a life insurance policy that offers coverage of at least $300,000. Ideally, it should offer up to $600,000. Unfortunately, higher coverage means high premiums that not everyone can afford. So, it is best to discuss your financial goals with a life insurance agent. Corona city in California has some of the best insurance agents that can help you select a plan suitable for your family. You can work with them to decide on the best and cheapest life insurance.

Consider Your Debt and Lifestyle

The 10x or 20x your income is a general rule for buying health insurance. But, it is for an average household. If you have existing debt, the ideal insurance policy for you pays off your debt in full and with interest.

For example, let’s say you have a car loan of $5,000 and a home loan of $10,000. You need an insurance policy with at least $15,000 to cover your debts. 

The size of your insurance coverage also depends on your dependants and their lifestyle. 

If you have children, parents, and a spouse, you need a policy that offers financial coverage for children’s education, parents’ health, and other home expenses. The coverage should also protect your family from future inflation. 

The 10x rule does not work for every family. It is the minimum coverage. The ideal coverage for you depends on your lifestyle and the number of dependants. For example, your family will need more than 10x your income if you live in a rental apartment or a family member is undergoing treatment for chronic medical disease. 

Add an Extra $100,000 per Your Child’s School Expenses

One of the most important calculations in your life insurance policy is your child’s education, as schooling is the biggest expense for a family. If you have two or more kids, you need to keep an extra $100,000 per child’s education (in addition to the 10x your income). 

Follow the DIME Formula

The DIME (Debt, Income, Mortgage, Education) helps you take a closer look at your financial obligations. Using this formula, you can select a life insurance policy that:

  • Pays off your debt
  • Is equal to or more than 10 times your current income
  • Pays your mortgage
  • Meets the cost of sending your kids to school (cover tuition fees and other academic expenses)

This is one of the most comprehensive formulas for calculating the life insurance coverage estimate. Instead of calculating everything separately, you can use the DIME formula to get a quick estimate of an ideal life insurance amount.

If you can’t figure out the right coverage, consider hiring a life insurance agent. You can discuss your debts, assets, family, lifestyle, education, career goals, and other financial aspects with a professional before choosing a suitable life insurance policy. The budget is also an essential thing to factor in the calculation, as your family can claim the death benefit only if you pay the premiums regularly. 

So, why wait? If you live in California, you should hire one of the best life insurance agents in Riverside County, California, Dr. Francisco “Kit” Tagle, and sign up for life insurance that works for you and your family. 

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