Different Ways To Figure Out How Much Life Insurance You Really Need

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It's important to get enough life insurance so that your family will be taken care of financially if you die. One way to figure out what you need is to use a life insurance calculator.

Let's look at how you can figure out how much life insurance you need and how a life insurance calculator can help you find the right policy for your needs.

Life Insurance Calculators

Using an online life insurance calculator is a simple way to figure out how much coverage you need. Most work like this: you put in your annual income, how many years your dependents will need financial support, your debt, future college costs, funeral costs, savings, and any other life insurance coverage, and you get a result right away.

A good way to figure out how much life insurance you need is to use a formula that takes into account your future financial obligations and assets, like savings, that your loved ones can use if you die.

So, if you make $50,000 a year and want to support your family for 10 years with that amount, you'll need to save $500,000. (If you are a stay-at-home parent, you can figure out how much it would cost to care for your kids if you died instead of using your salary.)

There are also debts and costs you need to pay for in the future. To do this, figure out how much you owe or expect to owe for the following financial responsibilities:

• Debt, such as loans, mortgages, and credit card bills
• Any funeral or burial costs you want paid for in the future, such as college tuition

Say they add up to $300,000. We'll add this debt to the amount of money you make each year. That gives you $800,000 to pay your bills and cover your annual income.

Your savings and any life insurance you have also come into play. Now, we want to take away your assets, such as money in a savings account, a retirement plan, or another life insurance policy.

Let's say, for example, that you have $200,000 in savings and other assets that your family can use if you die. We take that amount away from your income and debts.

Based on their income replacement needs, financial obligations, and assets, the hypothetical "you" may need $600,000 in life insurance.

How to figure out life insurance coverage yourself

Here are some things to think about as you decide how much life insurance you need.

Determine what kind of life insurance you need.

How much coverage you need depends on why you want to buy life insurance.

• Do you need life insurance until your mortgage is paid off and your kids are in college? In that case, it might make sense to get a policy for a certain number of years.
• Do you want coverage for your whole life or the chance to build cash value? Then it would be better to get permanent life insurance.

Think about your other life insurance plans.

When figuring out how much life insurance you need, you should take into account any policies you already have.

• Group life insurance is something that many employers offer to their staff. Most of the time, these policies are free, but they have small death benefits and are tied to your job. When you quit your job, you'll probably also lose your life insurance.
• Still, when you figure out how much life insurance you need, you can take into account any coverage you already have.

Think about the other benefits of life insurance.

With riders, you can change how a life insurance policy works.

• A life insurance rider is an extra piece of coverage that can be added to a policy. Depending on the rider, you may be able to use the coverage while you are still alive.
• Most life insurance policies come with an accelerated death benefit rider at no extra cost. It can be very useful because it lets you get money from your own death benefit if you are nearing the end of your life.
• Other riders, like a long-term care rider or a waiver of premium rider, usually increase the cost of the policy, but they are a way to make sure you get exactly what you want from your life insurance.

How to figure out how much life insurance you need the old-fashioned way

There are other ways to figure out how much life insurance you need besides  calculators. Here are 4 choices.

Option 1: Take your annual income and multiply it by 10.

The easiest way to get an estimate, but also not a very good way, is to multiply the income by 10. You multiply your annual income by 10. All done.

If you make $100,000 a year, you would multiply that number by 10. That's a suggested amount of coverage of $1 million.

But if you use this method, you might not have enough insurance at all. It doesn't take into account many of the things that should be taken into account when figuring out life insurance. Some of these things are your debts, your mortgage, and the education needs of your future children. It also doesn't take into account stay-at-home parents, who may not have a salary but are very important to the household.

If that parent dies, the family might have to pay for services like child care, cleaning the house, and so on. This isn't taken into account by the "10 times income" method.

Option 2: Take your annual income and multiply it by more than 10.

It might not be enough to multiply your income by 10. But, as we've already said, just multiplying your yearly income by a random number doesn't take into account your unique situation. Use a life insurance calculator that takes into account both what you expect to need and what you already have that could be used.

Option 3: 10 times the income plus $100,000 for college

If you have kids who will need to go to college, you could also multiply your income by 10 and add $100,000 to pay for it.

Like the 10 times income method, adding $100,000 for college gives you an estimate, but it doesn't take into account other things that should affect your life insurance coverage.

Option 4: Using the DIME system

The DIME method takes into account more factors for life insurance than just multiplying your income. DIME stands for:

Debts and final costs: Add up all of your debts, like credit cards and loans, and estimate your final costs, like the price of a funeral.

Income: Figure out how much money your family will need every year and multiply that amount by the number of years they will need help.

Check to see how much you still owe on your mortgage.

Education: Think about the education your kids will need in the future, including college.

When you add up all of these costs, you should have a good idea of how much life insurance you need. You should keep in mind that the DIME method doesn't count your savings or costs like child care.

How to Find the Best Rates for Life Insurance

Once you know how much life insurance you need, you can think about how to get it for the least amount of money. Here's what to do:

Don't put off getting life insurance.

You'll pay much less for life insurance if you buy it when you're younger and healthier. For example, a 30-year-old man pays an average of $300 per year for a $500,000 20-year term life insurance policy. For a man who is 50 years old, the price goes up to $936 per year.

Buy term life insurance at the cheapest prices.

A term life insurance policy lets you lock in low, level rates for a certain amount of time, like 10, 20, or 30 years. Whole life insurance is meant to last a person's whole life. It builds cash value but costs more.

For example, a 30-year-old man would pay only $192 per year for a $250,000 20-year term life insurance policy, but he would pay $2,535.72 per year for a $250,000 whole life insurance policy.

Life insurance riders you don't need should be skipped.

Riders for life insurance add benefits, like not having to pay premiums if you become disabled, but they also make your policy more expensive. If you want the cheapest life insurance rates, don't get any riders that aren't necessary.

Look around for the best prices on life insurance.

Compare quotes from different companies for life insurance to see which one gives you the best price, policy, and service. Life insurance rates vary from company to company, so you can find the best rates for your age and health by comparing quotes online or working with an independent insurance broker.

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