Its a common question: “How much life insurance do I need?”
But before we even get into the answer, lets address the fact that even asking the question says a lot. Asking that question means that you’re thinking about the important things in your financial life and that you are willing to drill into the details to make sure your bases are covered. Those are the people that we love to work with – you’re proactive and involved and willing to take action and not procrastinate. So let’s take some action and dive into how much life insurance you really need.
To answer this we use something called the D.I.M.E method. This simple acronym is a map for us to discover what your real needs are – both for your living benefits (yes – you can use life insurance while you’re still alive) and for what your family might need after you’re gone. So lets walk through our four letter acronym and calculate your needs.
The first and most immediate concern is to figure out your total debts and how much it will actually cost to bury you, cremate you, or shoot you into space if that’s your last wish. The debt portion means any credit card, student loans, car notes, lines of credit, IOUs, or any other person, bank, government institution, or loan shark that you happen to owe money to (we’ll leave out your mortgage here and come to that later). Nowadays the average funeral costs around $10,000 – so add that onto your debt numbers.
The majority of American families today rely on more than one earner to make ends meet. Its a far cry from the image of the 50’s when Dad was the primary earner and Mom stayed home. Nowadays our families rely on both spouses/partners to help make ends meet and plan for the future. If you were to pass away you need to include a certain number of years to replace your own income so that your loved ones can continue living the lifestyle that they deserve and to ensure that they have adequate time and resources to be able to move on emotionally after you’re gone. Typically we aim for at least 5 years of your gross income – so if you’re making $60,000 a year you want to make sure your family has at least $300,000 allocated here.
The largest amount of “good” debt a family will have is their mortgage and its not something that you want to leave outstanding. Make sure that your life insurance AT LEAST covers your mortgage so that your loved ones do not have to worry about keeping a roof over their heads. Of anything here – this is the most important one.
Unless you’ve been living under a rock for the past few years, you’ve probably heard about the rising cost of college education. The average in-state, public university costs approximately $9,400 per year in tuition – not including room and board. If you have children or if you have a spouse/partner who is considering going to college you have the option to ensure that they can do it without having to struggle with paying the bills. Especially since your spouse/partner is set to lose your financial income – they may want to make a career change that necessitates having further education. For many people, this category is the least important only because it is the least immediate cause of concern. However, it is set to be a much larger expense than most mortgages in the coming years. There is an excellent college cost calculator here to help you figure out this number.
Adding It All Up
Once you have those numbers, lets add it all up and see where you’re at.
Debt/Death: $19,000 (Average Family Debt of $9,000 + $10,000 Funeral Costs)
Income: $300,000 ($60,000 for 5 Years)
Mortgage:$200,000 (Average Mortgage Debt)
Education: $40,000 (4-Year In-State, Public University for one person)
Its probably more than you thought you needed – but most people make the mistake of never diving into how much they actually need and just rely on the $150,000 or so that they may have through their employer. You may also think that this amount is just not affordable – but in reality for a healthy, non-tobacco using 33 year old this amount of coverage will only cost approximately $50 a month for a 20-year term policy. For what is the price of one night-out per month your family can have all of the protection that they need. You’ve already asked the question and now that you have the answer are you ready to take action to ensure that your life, your lifestyle, and your family’s lifestyle is protected? Remember that procrastination costs money – and if you procrastinate with life insurance it will cost you. Take action today!