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Wealth Management, Life Insurance

Protection for Your Loved Ones

Life insurance is a key component to having a comprehensive financial plan in place. Being able to replace your income for your loved ones can help give you peace of mind and provide much needed money when you can no longer provide a paycheck.

The Importance of Life Insurance

Life insurance can replace income for your family in the case of your death. It can help to pay for costs that your paycheck would otherwise cover. It can pay off the mortgage so your spouse doesn’t have to worry about making payments, it can pay for tuition for the kids, and it can help your family to get by when you’re no longer able to provide the income needed for them to survive. It can also help to pay for expenses or taxes associated with your death, preserving any wealth you have left behind. If you choose to leave money to your favorite charity, the amount you want to leave can easily be included in the total amount of coverage.

With Two Main Types of Life Insurance, Which One is Right for You?

Term Life Insurance

Term Life Insurance is often purchased by people to make sure their families are taken care of in case of an untimely death. A common span for insuring is 15 to 20 years, giving younger families security until the children are grown and out of the house or in case the mortgage hasn’t been paid off. This type of insurance only pays out a death benefit and there’s no accumulation of money that can be taken out. The premiums are often less expensive the younger a person is when they purchase it and it’s considerably cheaper when compared to other types of life insurance.

Permanent Insurance

For anyone who wants insurance that lasts longer than 20 years, permanent life insurance can be the most cost effective. Permanent insurance is often called whole life or universal life insurance. The policy is created with an investment component and it accumulates savings tax-deferred. Depending on the policy, you may be able to borrow from the cash value that has built up.

Things to Consider

When deciding how much life insurance you need, there are a few things to consider based on your age and life stage.

Age 30
  • Do you have young children?
  • Do you have a mortgage?
  • Do you have significant debt your spouse would have a difficult time paying off without your paycheck?

Age 50
  • Do you have children in college?
  • Are you still carrying debt?
  • Have you considered a reverse mortgage?
  • Do you have enough retirement income?
  • Do you want to simplify a transfer of assets?

How to Factor How Much Life Insurance You Need

There are several ways to figure out how much life insurance you need.

1 - Multiply by 10

The easiest way to figure out how much life insurance you need is to multiply your current income by 10. So if you make $50,000 a year, you would need to buy a policy for $500,000. If you make $100,000 a year, you need coverage of $1,000,000.

2 - Increase Your Multiple of 10

Although multiplying your income by 10 is a good general rule, you might want to increase the amount of the policy based on other factors, such as putting children through college. In that case, it would be good to add an additional $100,000 for each child. While college may not cost that much now, depending on the school, the rate of attending increases every year.

3 - Use the DIME Formula

For those who want to get a more exact number, the DIME method works to get a better overall picture of exactly how much life insurance you would need to purchase. The acronym stands for:

D - Debt:

This includes all debt except the mortgage. You can include funeral costs in this category as well.

I - Income:

Figure out how many years you need to support your family then multiply that number by your annual salary.

M - Mortgage:

Look at your last mortgage statement and find the payoff amount.

E - Education:

Determine how much you think it will cost for your children to attend school or college.

While the DIME method can give you a more accurate figure, there are a few other things to take into consideration. You may want to subtract other investments or retirement benefits that will pass on to your beneficiaries in case of your death. For couples where one stays home to take care of the children, replacing that care can be costly and replacement of those duties should be added into the overall figure.

When you have life insurance in place, it can give you peace of mind that your loved ones will be taken care of. The money can replace your income and take care of other financial concerns when you’re no longer able to.

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