How much life insurance do I need? We know that life insurance is one of those things that everyone wants to consider. However, it is essential to understand how life insurance works to make sure your family is prepared for any eventuality.
What type of life insurance do you need?
There are two main types of life insurance, and each has its advantages.
Term life insurance: You pay premiums for a specific “term” or “period,” such as 10 or 20 years. During this period, if you die, a certain amount of money will benefit your family. However, if you want to remain insured, you must take out a new term life insurance policy after the term expires. The advantage of term life insurance is that you have the flexibility to change the plan and benefit amount.
Whole life insurance: This insurance is designed to indefinitely invest a portion of the premiums you pay each month. This allows the system to increase in value over time. This cost can be reinvested to pay the premiums. You can also “walk away” at some point with a high return that you can live off of, such as after retirement. However, this is not a decision to be taken lightly, as it means giving up the policy and a possible death benefit. Life insurance has the advantage that much more value accumulates over time, and each payout can cover all costs.
Planning for your situation
When deciding what type of life insurance you need, you should consider your situation. If you are young and working abroad, term life insurance may be more appropriate, as your circumstances may change. On the other hand, if you are older, have a growing family, and a stable lifestyle, term life insurance may better suit your needs.
Also, keep in mind that premiums tend to increase with age. It is important to discuss this issue with your partner early on as part of a joint financial plan.
How much life insurance do I need?
Once you’ve decided which type of life insurance is right for you, it’s time to calculate exactly how much coverage you’ll need. To do this, financial experts have developed the DIME formula, which calculates the appropriate level of coverage based on four factors: liabilities, income, mortgage, and education.
Debt: This one is easy to understand. If something were to happen to you, your family would pay the debts you owe. So bite your teeth, take your credit card bills and other checking accounts and add them up. That’s the amount you’ll need to pay off your debts. Life insurance can help your family when they need it most and make sure you get out of debt and legal expenses.
Income: The money you earn each year to support you and your family. You will need to make a reliable estimate of the amount your family would need without you: the equivalent of your salary. Do you have to spend five, ten, or more times your annual income?
If you are married with no children, you may need five annual salaries to support your spouse. If you have children, you should provide child support until age 18.
Mortgage: If you have a mortgage or down payment on a property, gather documents and statements to find out how much you have to pay or how much you have to pay off. If you own property in more than one country and use different currencies, remember to do a quick calculation based on exchange rates to arrive at a single figure.
Education costs: If you have children or are planning to have children, you may need to consider the cost of higher education. In some countries, education is free or heavily subsidized, but what if you live elsewhere, move to another country, or want your child to study in the United States?
If so, calculate and research the average cost of a degree in that country or country. You may also have to send your child to a private school. If so, add these costs to your budget.
Once you know the total value of these four factors, you will have a good idea of your life insurance needs. However, you can also subtract existing savings that can be used to cover the costs to make sure you are not over-insuring.