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How much life Insurance coverage should I have?

/ Life Insurance / Apr 2, 2021

To be honest, you cannot pinpoint how much coverage you need by coming down to the precise dollar. What you can do is to make a good estimate of the amount you need by assessing your current financial condition and imagining what your family will need in the coming years.

Generally speaking, you should figure out your life insurance requirement by estimating your long-term financial obligations and deducting the assets you already have. Your life insurance coverage should fill up the gap in between.

Three rules of thumb when estimating the amount of life insurance coverage you need

If you want to quickly decide the amount of life insurance coverage you need, Trust Life advisors recommend these three rules of thumb to come to a decision. Although it is always recommended to talk to a financial advisor before coming to a decision, these three rules are still better than a random guess.

Rule #1: Multiply your current income by 10

This rule does not take into consideration your family’s needs. It also does not consider your savings or existing life insurance policy. Also, this rule is not valid for stay-at-home individuals who should also have a life insurance plan without any income.

Coming back to the rule, consider your yearly income and multiply the same by 10. That is roughly going to be the life insurance coverage you need for the next 10 years at least.

Word of caution: This rule has seemingly gone outdated based on our current economy today and rate of interests. So, unless you are in a hurry to get yourself a plan and are on a very tight budget, we would recommend that you avoid this rule.

Rule #2: Purchase 10 times that of your income with an additional $100,000 for every child (college expenses)

If you have kids or plan to have kids soon, education expenses must be an important component of your life insurance plan.

This rule adds an additional $100,000/child to the previous 10-times rule. But it still does not delve deep into your family’s needs and goals. It also does not consider any life insurance coverage you might already have (like your work-life insurance – if any).

Rule #3: The DIME rule

This one takes a more detailed look at your finances in comparison to the previous two. DIME is the acronym for Debt, Income, Mortgage, Education. These are the 4 most important areas you should consider when deciding on your life insurance coverage.

  • Debt: Consider your debts – add them up (do not consider mortgage in this section). Also, make an estimate of your funeral expenses.
  • Income: Make an estimation of the number of years your family would need support. Then multiply your annual income by that number.
  • Mortgage: How much amount do you need to pay off your mortgage? Consider it here.
  • Education: Make an estimation of the amount of money you need to send your kids to school and college.

By adding all the above obligations together, you will get a much better view of your life insurance needs. However, this formula still does not include the coverage and savings you already have.

What we recommend

  • Make an estimate of your obligations: Your annual income (x the number of years you want to replace your income) + the amount of your mortgage + your debts + education needs for your kid. If you are a stay-at-home individual, consider the cost required to replace your service like child care.
  • Subtract your assets: Subtract your assets from the above amount (savings + current life insurance plan + college funds, etc.)

Get in touch with our financial advisors to determine how much life insurance coverage you need

The best suggestion would be to get in touch with our advisors to determine your life insurance coverage amount. Our advisors would assess your current financial situation, your future needs, and goals, and come up with a coverage amount that is the perfect fit for you.

We make sure you are neither overinsured nor underinsured in any way. Free consultation and zero obligation – talk to us today!