How much annual income would your dependents need? How long would your dependents need financial support? How much debt do you need to pay off? If you want to help with the cost of college tuition, how much would you like to cover? How much do you want to add for burial expenses? How much savings do you have? If you already have life insurance, enter the total coverage amount. Enter total coverage amount of existing life insurance. You can also determine your life insurance need with a pencil, paper and this basic equation:.
You want this income replacement to cover current and future expenses. If income replacement above would already cover mortgage payments and other expenses, no need to add more mortgage money. If so, add those in. You can include retirement savings such as a k plan , or leave it out of your analysis if your beneficiaries want to preserve that amount for retirement years.
You may run across other methods for calculating how much life insurance you need. These usually include:. Or by 5. Or by This rule of thumb is hard to pin down.
Better to look at your total needs and subtract the assets your family could use if you passed away. Some sites advise using the number of years until your youngest child turns 18, but we all know that kids often need financial help longer than that. The College Board regularly publishes trends in college pricing.
The DIME method is a good start for calculating a life insurance need, but it ignores existing financial resources that your family might tap for expenses. By itself, it could leave you over-insured. Financial obligations you want to cover such as your annual income for a certain number of years.
Once you have an idea of how much life insurance you need, you can start comparing life insurance quotes. Your health and insurance needs will evolve over time, and a good life insurance policy can accommodate those changes.
For example, the best term life insurance policies can be converted to permanent life insurance. Keep these tips in mind as you calculate your coverage needs:.
Think of life insurance as part of your overall financial plan. That plan should take into account future expenses, such as college costs, and the future growth of your income or assets.
Your income likely will rise over the years, and so will your expenses. Talk the numbers through with your family. How much money does your spouse think the family would need to carry on without you? Do your estimates make sense to them? For example, would your family need to replace your full income or just a portion? Consider buying multiple, smaller life insurance policies , instead of one larger policy, to vary your coverage as your needs ebb and flow.
For instance, you could buy a year term life insurance policy to cover your spouse until your retirement and a year term policy to cover your children until they graduate from college. Compare life insurance quotes to estimate your costs. Use the calculators below to get a sense of how much life insurance coverage you'd need to replace your current salary and any debts you're carrying. Life insurance calculator.
How to manually calculate how much life insurance you need. Your mortgage balance. Any other debts. Multiply your income by Buying a cheaper term life policy lets you save what you would have paid for a whole life policy, and perhaps invest the money elsewhere.
Can comfortably afford the higher premiums. Whole life insurance is a lifelong commitment, so you want to make sure you can afford it. If you miss your premium payments, your policy could lapse. Want to leave money for your heirs. Because the death benefit pays out regardless of when you die, you can use it as an inheritance. If you name life insurance beneficiaries on your policy, the payout will go directly to them and not through your estate.
Have a lifelong dependent like a child with disabilities. Consult with an attorney and financial advisor before setting up a trust. Want life insurance that builds guaranteed cash value. The cash value of whole life policies grows at a guaranteed rate set by the insurer. If you need lifelong coverage but want more investing options in your life insurance than whole life provides, consider other types of permanent life insurance. Universal life insurance earns interest based on current market rates.
Variable life insurance or variable universal life insurance both give you access to direct investment in the stock market. While the premiums you pay for whole life and term policies are typically set from the beginning, these other options often have varying costs depending on the performance of your cash-value account and the type of coverage you buy.
That can lead to great savings or to unexpected expenses. As always, discussing your individual needs with a fee-only financial planner is a great first step. Term life insurance is a temporary policy, which means your coverage expires once your term is up. If you still need life insurance, you can purchase a new policy, though you can expect to pay higher rates.
The main disadvantage is the cost. Whole life insurance is often significantly more expensive than term life insurance because it offers lifelong coverage and becomes a cash asset over time. If you want a policy that builds value over time, look into permanent life insurance. Term vs. How to choose between term and whole life insurance. Other life insurance options. Show More. What is term life?
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