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Tips for Calculating How Much Life Insurance You Need


Life Insurance Calculator

Getting enough life insurance coverage is vital to ensure that your loved ones are cared for financially if you die. A life insurance calculator is one way to figure out what you need. Let’s take a look at ways you can decide how much life insurance you need and how a life insurance calculator can get you on the path to finding the right coverage for your specific situation.

The Formula in Our Life Insurance Calculator

A good estimate of life insurance needs requires using a formula that includes your future financial obligations and your assets, such as savings, that your loved ones can use if you die

We use this formula in our life insurance calculator.

The first step is:

·     Take your annual income and multiply it by the number of years your loved ones will need that salary. So, if you make $50,000 and want to provide your family with that income for 10 years, that would give you $500,000. (If you care for a child, you can estimate how much it would cost to get child care if you die rather than using salary data.)

·     Combine financial obligations, including your mortgage, future college costs, credit card debt and loans. Let’s say those total $300,000. That gives you $800,000 for annual income   and financial obligations.

·     Now, you’ll want to subtract your assets. For instance, let’s say you have $200,000 in savings and other sources that your loved ones can get if you die. You’d subtract that from your income and financial obligations.

·       Our example would mean the person may need $600,000 in life insurance coverage.

Tips for Calculating How Much Life Insurance You Need

Here are things to keep in mind when deciding your life insurance needs.

1.       Figure out the type of life insurance you need

Your reason for buying life insurance policy factors into how much coverage you need.

·   Do you need life coverage until you pay off your mortgage and through your children’s college years? In that case, a term life insurance policy to cover those years may make sense.

·  Do you want lifelong coverage or the opportunity to build cash value? Then, a permanent life insurance policy would be better.

2.       Take into account other life insurance policies

You should factor in any existing life insurance policies you have when gauging your life coverage needs.

·    Employers often offer group life insurance to employees. These policies are usually provided at no cost but offer limited death benefits and are connected to your employment. Once you leave the job, you’ll likely lose life coverage, too.

·    Nevertheless, you can subtract existing life insurance when you calculate your life insurance needs.

3.       Consider other life insurance benefits

You can customize a life insurance policy with riders.

·  A life insurance rider is an optional add-on to a policy that provides additional coverage. Depending on the rider, you may be able to benefit from the coverage while you’re still alive.

·    An accelerated death benefit rider is often included free of charge on life insurance policies. It can prove to be very valuable because it lets you access money from your own death benefit if you are terminally ill.

·     Other riders such as a long-term care rider or a waiver of premium rider usually add cost to the policy, but are a way to customize life insurance to get exactly what you want.

How to Manually Calculate How Much Life Insurance You Need

Besides using the life insurance needs calculator, there are other ways to estimate your life insurance needs. Here are four options.

Multiply your annual income by 10

The 10 times income method is the easiest way to get an estimate but also not a very good method. You take your annual income and multiply it by 10. That’s it.

So, if you’re making $100,000 annually, you’d multiply that by 10. That’s $1 million of suggested coverage.

But using this method could leave you wildly underinsured. It doesn’t take into account many factors that should go into a life insurance calculation. Those factors include your debts, mortgage and future children’s education needs. It also ignores at-home parents, who may not have a salary but whose household contributions are critical.

If that parent dies, the family may have to pay for child care, house cleaning, and other services. The “10 times income” method doesn’t take that into account.

Multiply your annual income by more than 10

Multiplying your income by 10 might not be enough. But as we mentioned, simply multiplying your annual income by a rather random number doesn’t account for your individual situation. It’s better to use a life insurance calculator that factors in both anticipated needs and existing assets that could be used.

10 times income plus $100,000 for college

If you have children with future college needs, another option is to multiply your income by 10 and then tack on $100,000 to pay for college.

Much like the 10 times income method, simply adding $100,000 for college gives you an estimate but doesn’t take into account other factors that should influence your life insurance coverage.

The DIME method

The DIME method includes more life insurance factors than multiplying your income. DIME stands for:

·       Debt and final expenses: Calculate all of your debts, including credit cards and loans, and estimated final expenses, such as the cost of a funeral.

·    Income: Figure out how much money your loved ones will need annually and      multiply by the number of years they will need that support.

·       Mortgage: Check how much you owe on your mortgage.

·       Education: Think about your children’s future educational needs, including college.

Combine all of those expenses and that should give you a rough estimate of how much life insurance you need. The DIME method doesn’t include your savings or costs like child care, so you’ll want to keep that in mind.


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