Your long-term goals may include retiring on the lush green coastline north of Vancouver or spending some time fishing near Halifax, Nova Scotia. But what happens if you suffer an untimely death? After this past year, it is a possibility that we all think about, or should. Would your spouse still be able to enjoy their golden years? Would they be able to manage to keep the house and send the kids to college? Life insurance can help with all of these concerns, but only if you buy enough. So how much coverage should you purchase?
How Will My Life Insurance be Used?
The first thing that insurance pays for is your final expenses. This can include funeral arrangements, hospital bills, or other debts accumulated in your last days. After that, it depends largely on where you are in life right now.
If you are just starting on your journey, your coverage should be enough to pay off the mortgage, replace your income, and ensure comfort and education for your kids. When approaching retirement, you will need less money for the kids but will want to ensure that your spouse has sufficient funds to enjoy their final years. Perhaps you never married, but have loved ones that you designate some kind of legacy from you.
A Simple Rule of Thumb to Calculate a Good Life Insurance Amount
So how much is enough? There are two quick rules used to generate a starting point or general number.
DIME is the first. Add together your:
- D for Debt (car loans, credit cards, other personal loans)
- I for Annual Income (multiply by a set number of years)
- M for Mortgage (remaining balance on the loan)
- E for Education ($120,000 multiplied by number of children)
This calculation provides greater flexibility in generating a number because you decide just how many years of income you wish to leave for your family. However, if you are under the age of 40, there is a greater tendency to underestimate the real impact that the loss of a major earner places on those left behind.
The second quick calculation is simple. Simply multiply your annual salary by 10.
Once again, it may look like a big number, but it may leave a large financial hole when you are looking at supporting your family for 30 years or more.
Think About Your Kids, College, and Retirement Funds for Your Spouse
How much will it cost to send one child through four years of college? Experts calculate that a child born today will need more than $125,000 to pay for a four-year degree. If they earn their way into a prestigious institution, the cost could easily double. What about all the years of the soccer league, dance lessons, and summer trips?
Are you paying the same for a loaf of bread today compared to ten or twenty years ago? Calculating a policy that maintains your current income level for the rest of your spouse’s life may end up leaving them a little short at the end of the month. Make sure to add in a cost of living increase when forecasting financial needs over future years.
Two Life Insurance Policies Could Be Better Than One
Sometimes you may want to think about buying two or three-term life insurance policies. One will be a 20-year policy designed to cover your kids’ upbringing and education, and adding another 30-year policy helps to build a nest egg for your spouse. A 10-year policy is there as well to pay off the remaining mortgage. This helps you avoid having to shop for a new policy tailored to your current requirements while creating a whole life plan for your finances.
A Modest Life Insurance Policy will Help Your Family Survive a Difficult Time
Perhaps you really can’t afford the cost of a two or three-million-dollar policy recommended by an online calculator. In that case, purchasing a more modest whole life policy can still provide vital support when it is most needed. Even $100,000 or $50,000 can give your spouse and children enough breathing room to pay the rent and put food on the table while plans are made for their futures.
Ultimately, life insurance is all about fiscal responsibility for now and for the future of your family. Always work with a reputable agent that has your current well-being at heart vs. earning a higher commission on a big policy.