Getting life insurance can bring peace of mind, knowing your family will be taken care of financially if something happens to you. However, knowing if you’re getting good value on your future investment can be difficult. Join us as we explore different ways you can calculate the amount of life insurance you need.
The 6% Life Insurance Rule
This rule suggests spending around 6% of your annual income on life insurance premiums. So, if you make $50,000 annually, you’d aim to pay $3,000 annually on life insurance premiums. Due to its simplicity, this rule doesn’t account for your specific circumstances, goals, or financial obligations. Therefore, it may underestimate the life insurance coverage you require.
The 10X Life Insurance Rule
The 10X rule recommends buying a policy worth ten times your annual income. If you make $100,000, you’d get $1 million in coverage. Like the 6% rule, it’s a benchmark rule that doesn’t factor in other financial components. Basing coverage solely on income could leave your family vulnerable if you have substantial debts or expenses. Alternatively, it may suggest more insurance than you can reasonably afford.
The DIME Formula
The DIME (debts, income, mortgage, education) method offers a more inclusive method of calculating the value of life insurance values. To use this method, add up your DIME as follows:
- Debt, including mortgages, loans, credit cards, or any other balances owed
- Future income you would want to replace for dependents to maintain their current lifestyle
- The amount still owed on your mortgage, factoring in how far along you are in making payments
- Expected future college costs for any children or dependents.
Ultimately, you’ll want a life insurance policy value that guarantees your family will be well taken care of when you’re not around. And while rules and benchmarks can provide a solid starting point, having an in-depth discussion with an insurance agent is key to tailoring a policy that meets your family’s future financial needs.