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How Much Coverage Do I Need?

That depends. 

Generally, you can calculate the appropriate coverage amount by subtracting your assets from your long-term financial obligations. The remainder is what life insurance needs to cover. Term life insurance calculators can help you determine the right policy amount depending on your needs.

Furthermore, there are a few guidelines that can help you decide how much to buy. One of the easiest is to multiply your annual income by 10. Another technique would be using the DIME formula:

  • Debt. In addition to the total monetary value of all debts, think student loans, credit cards, and car loans, etc., you should also factor in funeral costs.
  • Income. The amount you need to pay for your family’s health care is determined by the number of years your youngest child will be in need of care (i.e. until age 18, 21, or 25). So, let’s say you want income protection for your child until they are 21 and you earn $50,000 each year after taxes. In this scenario, $50,000 x 11 years = $550,000. Don’t forget the cost of replacing services that you provide, such as childcare, if you are a stay-at-home parent.
  • Mortgage. The right amount of life insurance can enable your family to remain in their home. In this step, you simply add up your remaining mortgage balance. If you rent, you might want to plan as if you had 10 years of rental income.
  • Education. For parents, find out how much college or private school will cost your children. FYI, an average state-funded four-year university degree costs $100,000 per child. It includes tuition, board, and books.

You should also consider the cost of the kind of funeral you want if you are searching for guaranteed issue whole life insurance to cover final expenses.

  • The Advantages of Life Insurance 
      • One of the most important benefits of owning a life insurance policy is that if you die, your beneficiaries will receive a payout known as a death benefit to replace any income you generated.
  • Financial Protection for Your Family
      • With a life insurance policy, you pay a relatively small amount each month in premiums, but if you die you will receive an extremely large sum – the death benefit. It should cover living expenses, such as a mortgage, and tuition for your kids. Moreover, it can also provide a financial buffer in case unforeseen expenses arise.
  • Life Insurance Can Fit Within Most Budgets
      • For a term life insurance policy, you may pay as little as $20 per month in premiums, depending on how much coverage you need and your age when you apply. By reducing your coverage and term length, you can reduce your premiums even further.
  • Peace of Mind
      • Your life insurance policy may seem worthless if you do not die during the term of the policy. However, you’re not pouring your money down the drain; you’re getting protection in the event of your death, which can occur unexpectedly. Ultimately, your family’s financial security is what you’re paying for.
  • It’s Never Been Easier to Apply For Life Insurance
      • With platforms like Due, you can apply for a life insurance policy in under just ten minutes. 
  • Life Insurance Completes Your Financial Plan
      • Along with retirement vehicles like a 401(k) or annuities, life insurance should also be part of your financial plan for additional protection. 
  • Cash Value Life Insurance Can Help You Save
      • Cash value is a feature that allows you to save for retirement while still enjoying coverage under permanent life insurance. In general, whole life insurance has the highest premium, since it pays a death benefit and a savings account that earns interest.
  • The Disadvantages of Life Insurance 
      •  Paying premiums monthly or annually for this benefit is a disadvantage. 
  • Life Insurance Can Be Expensive
      • A young and healthy individual is most likely to find affordable life insurance. However, life insurance companies charge you more for coverage if you have a profile that raises red flags, such as your medical profile, family medical history, and age. As such, a life insurance policy can be helpful for your family, but terrible for your budget if you’re already heavily burdened by medical bills.
  • Whole Life Insurance is Expensive — Regardless of Age
      • An entire life insurance policy can cost hundreds per month. Even if you get coverage, that’s simply too much money for most Americans. In a study conducted by the Society of Actuaries, it was revealed that 45% of people cancel their whole life insurance policies within 10 years because of unaffordable premiums. 
  • The Cash Value Component is a Weak Investment Vehicle
      • Investing the money in a Roth IRA yields a better rate of return on average, but surrendering the policy for cash is more expensive, making it less than ideal.
  • How to Get the Most Out of Life Insurance
      • As you weigh up buying life insurance, there are a number of issues you should consider.
  • Sign Up For Life Insurance as Early as Possible
      • It’s cheaper to buy life insurance when you’re younger and healthier. It will ensure you have coverage even if you don’t need it now – if you anticipate having dependents in your 30s, you can save money by purchasing a policy now.
  • Be Honest on Your Application
      • After a policy becomes active, the contestability period lasts two years. In this time period, your life insurance company may do an investigation if they believe that you lied about your health or that you have risky hobbies that you haven’t disclosed. If they discover that you weren’t honest, they may cancel your policy. 
  • Buy Only the Coverage You Need
    • Typically, people only need term life insurance, but they may benefit more from whole life insurance. Comparing returns on various retirement accounts with the amount you would receive from a life insurance policy with cash value should give you a better idea of the returns you may receive from a standalone retirement account. 
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