Financial experts will often say your life insurance policy should come to 10 to 12 times your annual income. The exact number you need will vary depending on many, many personal and financial factors. Here are two simpler factors:
Debt repayment – you can use life insurance to pay off student debt, mortgages, personal loans etc. Your policy should cover enough to pay them off, including interest rates in the event of the insured’s death.
Income replacement – the coverage you need will depend on many things, including how many sources of income there are in your household. If you have kids, you may want to take out life insurance for both spouses.
However, this is a simplified approach, and you may want to consider an alternative. For example, the DIME formula:
The DIME formula has four components:
Debts: Count up total liabilities excluding mortgages.
Income: Multiply your annual income by the number of years your dependents are likely to need support. For example, until they are out of education.
Mortgage: Calculate your owings on your home.
Education: Estimate the cost of your children's education (if applicable).
The total of the components above will give a rough estimate of how much coverage you may need. If you believe you will receive raises throughout your career, then consider increasing the coverage amount. On the other hand, consider reducing your coverage if you already have life insurance policies.
Note - this formula does not account for all expenses and therefore should be altered accordingly.
HOW MUCH INSURANCE DO I NEED? COMPLETED. ✅
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