When purchasing a life insurance policy, getting the right amount of coverage is essential to make sure your loved ones are taken care of when you are gone.
Simply going online and purchasing a life insurance policy can be a good idea, but it can leave you underinsured.
Instead, doing your research ahead of time can give you the peace of mind that you are giving your loved ones the right amount of protection.
Why get life insurance?
Getting a life insurance policy may seem like an unnecessary expense but in reality, it can be a valuable investment. In fact, only 52% of Americans have life insurance.
There are many reasons why you would want to get life insurance like to pass down generational wealth, or simply cover funeral expenses.
However, the most common and important reason to get life insurance is to cover debts and lost income. Regardless of the reason why you believe in purchasing a policy, it all comes down to the amount of coverage you have.
How much is enough
Quickly choosing a life insurance policy online can seem like a good idea. While it is better to have some coverage than no coverage at all, you may end up being underinsured.
When looking into life insurance, a good starting point is to have 10 times your income in benefits. This would allow your loved ones to live for at least 10 years replacing the lost income so you do not have to worry about how to pay your bills.
Using the right model
Figuring out how much life insurance you need is based on many factors.
The best model to use is the DIME Model (Debt, Income, Mortgage, Education) because it can give you a good idea about what your expenses are and how much money you need to maintain your lifestyle.
Here is an example of a DIME breakdown according to average American spending and debt:
- Debt: $158,209
- Credit Card $14,241
- Student Loans $58,112
- Auto Loans $31,142
- Income: $60,575
- Mortgage: $202,454
- Education (if applicable) $25,000 per year
Total: $445,000
Given this model, you would need at least $450,000 worth of life insurance to ensure your debt payments, income, and housing costs are all covered.
What is wrong with this model?
Although this model is an easy calculation, it has flaws. First, it does not account for any unexpected expenses that may come up. If you budget your life insurance based on the amount of debt you have but more debt is incurred, you may not have enough life insurance.
Secondly, this model does not account for any changes in lifestyle. What if you decided to move or change jobs? The amount of life insurance may not cover the cost of the new home or replace the same amount of income needed to sustain this change.
How to get the right amount of coverage
The DIME model can be a good starting point, but you also have to figure out what else you may want to spend money on when another income is not available. For example, you will have to figure out how long you could live without working, or if you have any medical expenses you need covered. Also, you could include variable spending for entertainment, travel, or other expenses.
Working with a broker and financial advisor is also a good first step to making sure you have the right amount of life insurance.
In conclusion, having life insurance can protect your loved ones when you are gone. Doing your research ahead of time can further help your loved ones because they will not have to worry about changing their lifestyle when there is a loss of income.
Contact us today for a free consultation.