10 Aug, 2021

Find Out How Much Life Insurance You Need!

Find Out How Much Life Insurance You Need!
Written by: - Phil Baker

The coronavirus (COVID-19) pandemic has raised many concerns among the general population. One of those valid concerns is getting a life insurance policy to secure the future of their families. But the main concern is always about 'How much life insurance do I need'? A life insurance policy provides your loved ones with financial security and gives you mental peace.
It is planned in a way so as to protect you and your loved ones in case of any unforeseen circumstances. Moreover, buying a life insurance policy frees you up from the biggest concern of life, i.e.who would take care of your family after you? When opting for a life insurance policy, most people face perplexing questions like how much life insurance do I really need?

How To Calculate The Amount Of Optimum Life Insurance?

It is very important to calculate the adequate amount of life insurance to be bought so that you are not under-insured. Calculation of your life insurance requirements is no rocket science. It is actually based on some simple arithmetics, a.k.a addition, and subtraction. How much life insurance do I need = My financial obligations - My assets that can be utilized in future
It is as simple as that. Oh, but wait! But here's a twist. We do not know of any exact formula or equation that can be used to calculate exactly how much life insurance coverage you need. However, there are several ways to get a rough estimate of the insurance needed.

Rule Of Thumb For Life Insurance Policy Calculation

This rule of thumb is a quick and easy way to get a rough estimate of the value of insurance. According to this very basic rule, the required amount of your life insurance policy is 10 to 12 times the amount of your salary. This rule, although very simple, usually fails to account for some very crucial aspects of your financial life.

DIME Method For Insurance Policy Calculation

How much life insurance coverage you need can be estimated by the DIME method. The acronym DIME stands for Debt, Income, Mortgage, and Education, respectively.

  1. Debt - the amount you will have to pay

  2. Income - your salary multiplied by the number of years you want to support your family.

  3. Mortgage - money left in regard to mortgage

  4. Education - finances required for the education of your children

The sum of these above values will give the answer to your question 'how much life insurance do I really need?'. The DIME method is very useful when it comes to covering all the basic needs of a family. But, unfortunately, it fails to cover all the aspects of your financial life. This method does not take into account your previous assets, your personal choices, and the expenses needed at the end of your life.
This leads to either under or over-estimation of the amount of life insurance needed in most of the cases.

Top 9 Factors Determining The Amount Of Insurance Coverage You Need

The answer to 'How much life insurance do I need?' depends on many important factors, including your financial situation, personal needs, expenses, and dependents in your family. Every family has different financial needs. All the factors sum up to calculate the financial needs of a particular family and eventually help to determine the amount of insurance coverage that would be sufficient for that family.
Some important aspects to be covered when considering your financial responsibilities are: 

1. Salary Substitute

One must want to keep providing their family with at least the same amount with which they used to provide them when they were alive. In order to make it happen, multiply your income by the number of years for which you want to replace your salary. This would be enough at least to cover the everyday living expenses of your loved ones. 

2. Children's Academic Expenditures

A person must keep in mind the possible educational expenses of their children that may incur in the future. It is necessary if you want your children to continue their studies after you are gone, without facing any hurdles. The finances required for your kid's education will vary according to what degree they plan to opt for and what college they will want to join.

3. Debts And Loans To Be Paid

If you have any long-term debts or loans to be paid, keep them in mind when searching for an answer to 'How Much Life Insurance Do I Need?' Keeping a part of the life insurance amount specifically for this purpose will cover your debts, any house loan, or a car loan. This is a very important factor that needs to be considered by small business owners and entrepreneurs.

4. Any Mortgage Expenses Left

If you have bought a house or any other asset on the mortgage, your life insurance will be able to fulfill any such payments in the future so that your family has a roof over their head even after you pass away. Just keep in mind that you buy sufficient policy to cover these expenses.

5. End Of Life Expenses

You would definitely want to set aside some money for your last days and funeral expenses. In addition, some of you would want to add the expenses for your final rites into the amount of the insurance policy so that your loved ones will not have to worry about your end-of-life expenses while going through the emotional trauma of your loss. 

6. Age Of The Dependents

One answer to 'How much life insurance coverage do you really need' lies in the ages of the people depending on the policyholder. If you have little kids in your house or your parents who you have to provide for, then your amount of life insurance raises accordingly. This is because the expenses for growing children and for the elderly are very high these days, especially taking into consideration the current situation of the pandemic.

7. Affordability

The question 'How much life Insurance do I need' actually depends on the affordability of the person opting for the insurance policy. It is an important factor as being able to pay for the life insurance policy is very crucial for keeping it active. If you are unable to pay for any of your insurance installments, your insurance policy may be terminated. Therefore, you must choose the amount that you are easily able to pay periodically.

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8. Fluctuation In Everyday Expenses

The fluctuations in salary, everyday living expenses, and inflation should also be kept in mind while deciding how much life insurance policy you require. After all, the market keeps fluctuating with the passage of time.

9. Age And Health Of The Policy Holder

Your age and health also play an important role when determining the amount of insurance coverage required for a reliable insurance plan. Older people will need less coverage for insurance. This is because they will have fewer dependents needing insurance support after they pass away. Moreover, older people have attained more financial stability relatively and thus have little or no debts to pay.
Similarly, people with health issues need more coverage as they may need to cover large hospital bills through this insurance. Therefore, health insurance is very important, especially in countries that do not cover the medical expenses of their citizens. 

Assets That Decrease The Amount Of Insurance Needed

Some of your assets may decrease the amount of your health insurance needs. Let's have a look at what those assets are and how they affect the insurance coverage required. 

1. Savings

Got some savings in your bank account? Your family can utilize some of them in the future, and that can lessen the amount of insurance required. After all, you save it for yourself and your family.  As a matter of fact, it may include savings in any form, whether it is your retirement savings or any property that you bought.

2. Already Bought Life Insurance

One person can buy multiple life insurance policies. If you have already got life insurance previously, you can subtract it from your amount of life insurance requirements.

What If You Are Over Or Underinsured?

Too little life insurance can lead to the family not being self-sufficient in case of unforeseen life events and the death of the policyholder. You don't want your family to suffer any financial issues after your death, do you? People may think that the more life insurance is, the better it is for their future. However, what they fail to take into consideration is that too much life insurance will cause higher outgo and affect the lifestyle and life stages of the policyholder.
Therefore, it is suggested to buy a life insurance plan that fits your needs.

Should I Get Life Insurance In My 20s?

Many of us mistakenly assume that life insurance policies are only for old married couples with children and homes. If you think the same, you need to think again. The younger you are when you buy your policy, the cheaper it is for you and more beneficial and rewarding too. So if you are also asking yourself, "Should I get life insurance in my 20s?”, here is some important information for you.

Types Of Insurance Policies

Let's start with getting know-how of how insurance works. There are basically two categories of life insurance:

  1. Term insurance

  2. Permanent life insurance

1.Term Insurance

Term insurance is designed in such a way that it covers specific events in a defined time period, for instance, a term insurance of $30,000 worth coverage over a time period of 30 years for a monthly payment of $30 till the term ends. These term insurance policies are more useful for people above 40 or 50 years of age with dependent families.

2. Permanent Life Insurance

The second type of insurance policy called permanent insurance policy which helps younger people accumulate cash value. For people in their 20 s it is better to choose this option. Permanent life insurance has further types like whole life, variable life, universal life policies. Any type of permanent insurance policy can pay off a young person in their 20s and become very beneficial if the person can afford the cost of insurance per month.
However, if a young person in their 20s is unable to afford permanent insurance, there are still some very attractive options available for him in the term insurance policy for very reasonable costs. Moreover, delay in buying an insurance policy is not a good idea because the insurance policy will get expensive day by day. The premiums will increase by an average of 8 to 10 percent per year.
So buying insurance sooner can save you money, and doing it at an earlier age is a much better option.

Merits Of Buying Insurance In Your 20s

  1. You can create a legacy for your loved ones

  2. Premiums cost less for younger people

  3. It is much easier to get coverage at an early age

Demerits Of Buying Insurance in Your 20s

  1. You will be charged with extra expenses as you will have to pay life-long installments of the life insurance.

  2. Possibility of better investment somewhere else - you may get a better return if you invest in the stock market for this long.

Conclusion

By and large, buying a life insurance policy is a very smart financial move that can provide you with the security of your loved ones and be an important source of assets too. However, all financial aspects must be taken into consideration before deciding for yourself 'How much insurance do I need to buy’. On analyzing different types of life insurance, it was evident that term insurance is cheaper while permanent life insurance is the better option for people in their 20s.
The sooner you decide, the better it is for you. The younger and healthier you are, the less your premiums for insurance will cost. Please check out these free budgeting apps in 2021 that can help you save little money prepared for life insurance fees.  In case you're working freelance to earn a little extra cash for life insurance fees, you can create a payslip for your own by using the online paystub generator."
So, go get yourself insured today and lead a responsible and carefree life!

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