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How Much Life Insurance Do I Need?

A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value—the amount that your policy pays if you die—depends on a few different factors. As such, the minimum amount of coverage you need may be very different from what someone else requires. If you want to quickly determine your existing life insurance needs, an estimate can be an easy way to get a value. These methods are better than a random guess but often fail to account for important parts of your financial life.


 3 ways to estimate how much life insurance you need

  1. Multiply your income by 10The “10 times income” guideline is often shared online, but it doesn’t take a detailed look at your family’s needs, nor does it consider your savings or existing life insurance policies. And it doesn’t provide a coverage amount for stay-at-home parents, who should have coverage even if they don’t make an income.The value of a stay-at-home parent’s work needs to be replaced if he or she dies. At a bare minimum, the remaining parent would have to pay someone to provide the services, such as childcare, that the stay-at-home parent provided for free.
  2. Purchase 10 times your income, plus $100,000 per child for college expensesThis formula adds another layer to the “10 times income” rule by including additional coverage for your child’s education. College and other education expenses are an important component of your life insurance calculation if you have kids. However, this method still doesn’t take a deep look at all your family’s needs, assets or any life insurance coverage already in place.
  3.  Use the DIME formula

This formula encourages you to take a more detailed look at your finances than the other two. DIME stands for debt, income, mortgage and education, four areas that you should account for when calculating your life insurance needs.

  •         Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
  •         Income: Decide for how many years your family would need support and multiply your annual income by that number.
  •         Mortgage: Calculate the amount you need to pay off your mortgage.
  •         Education: Estimate the cost of sending your kids to school and college.

By adding all these obligations together, you get a much more well-rounded view of your needs. However, while this formula is more comprehensive, it doesn’t account for the life insurance coverage and savings you already have. It also doesn’t consider the unpaid contributions a stay-at-home parent makes.