The Cost Of Taking Care Of Your Family-Here’s How To Choose The Amount On Your Life Insurance Policy

About sixty percent of Americans state that they have life insurance. However, having life insurance doesn’t mean that you’re adequately covered. If something happens to you, will your family be completely protected?

Most of the time, we’re required to have a certain amount of insurance for things, like our cars or homes. But taking out life insurance is a different story, and you might feel like you’re on your own. We’re here to clear things up. There’s no point in having a life insurance policy that doesn’t fully protect your loved ones.

In this guide, we’ll teach you how to choose the proper amount of life insurance coverage. Keep reading to get completely prepared for the future!

How to Choose Life Insurance Companies

First, you’ll want to choose a good company that will offer the coverage you need.

Check the company’s history: look for client reviews, and look at the National Association of Insurance Commissioners for more information. You’ll also want to compare rates and make sure the company is financially sound.

You don’t necessarily have to choose the biggest company. Sometimes, small and mid-sized insurance brands are just as stable. But you will want to do some research to find a good fit.

Getting Life Insurance Quotes

You’ll also need quotes so you can see how much you’re going to pay for the policy you need.

Once you’ve narrowed down the list of companies, and figured out about how much insurance you may need, compare quotes before making your final decision. The life insurance cost is an important factor: you need to be sure you can pay for the coverage you need.

Now, let’s look at how to get the numbers that will affect those quotes.

Questions to Ask Before Getting a Life Insurance Policy

These questions will help you determine the size of the life insurance policy you need.

1. Do You Really Need Life Insurance?

You might be wondering if you truly need a life insurance policy. If you aren’t sure about it, you might end up getting coverage lower than you should, because you want to save money on the premium. It’s important to be clear on what you really need.

If you don’t have dependents, such as children or a spouse that you take care of, life insurance may not be right for you. Of course, you need to be sure that you have enough to cover funeral costs and other end-of-life expenses. Otherwise, someone in your life will get held responsible.

If the assets you have are enough to provide for your dependents after you pass, you also won’t need a life insurance policy. But if your debts are greater than your assets, or your assets won’t provide for your dependents if you pass away, it’s important to have life insurance.

2. What Are Your Monthly Expenses?

Now that you can see if you really need the policy, you can delve into figuring out how much coverage you need.

Start creating a monthly budget, or another way of tracking your expenses. You can also check your past bank statements to get an average of your monthly spending.

Avoid guessing: the more precise the number, the better. The goal is to let your family have the same quality of life after you’re gone. If you guess this number and you’re wrong, your insurance policy won’t be able to provide that.

3. What Debts Do You Have?

You’ll also need to look over what your debts are. After you’re gone, your family will be responsible for paying off your debts. Your life insurance policy needs to cover those, your end of life expenses, and caring for your family.

Debts include student loans, car loans, credit cards, mortgages, and much more. You may want to take out a policy that covers your debts and then some, to account for the interest that will accrue over time.

4. How Much Do Your Dependents Really Need?

At the end of the day, this is the most important question.

If you live a cushy lifestyle now, maybe your life insurance payout will come with some lifestyle changes. But you should have a bare-minimum number for what your dependents need every month, or every year, to get by without you.

Ideally, your life insurance policy will exceed that number. However, meeting the bare minimum should be your first goal, and you can’t meet it if you don’t know the number.

Calculating the Amount You Need

Now, it’s time to get down to business: calculating the amount of life insurance you need.

Chances are good, the questions above will have led you to your answer, or at least close to it. But if you still aren’t sure, try this quick tip to guide you.

The DIME formula is one of the most effective and detailed shortcuts for calculating the life insurance policy you need. The formula:

  • D: debt
  • I: Income
  • M: Mortgage
  • E: Education

First, add the total of all of your debts, except your mortgage. Include the cost of your funeral and any other end-of-life expenses in this number.

Next, look at the number of years your dependents will still need your financial help. Multiply that number by your annual income to see how much it will take to care for your dependents for the years they need it.

The “M” step simply means looking at how much you have left to pay off in your mortgage.

Finally, get an estimate of the cost of your children’s college education.

Once you have these numbers, the life insurance policy you need should become more clear.

Ready to Find a Life Insurance Policy?

If you don’t need a life insurance policy, you’re in the clear. But if this guide has shown you that you need one, or that you need more coverage than you currently have, now is the time to take action.

Investments can also help you take care of your dependents when you’re done. Check out our guide to finding a great investment consultant here.