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Steps to Take When Estimating Life Insurance Needs

A few years ago, I wrote about life insurance and whether or not it’s worth investing in this type of insurance policy. In that article, I looked at the pros and cons of life insurance and the factors that you should consider before purchasing a policy. What I did not mention, was that you have to decide how much life insurance is enough.

Estimating life insurance needs for yourself and your family, basically comes down to the reason or reasons why you want life insurance. For example, I have a life insurance policy, but my policy was purchased to pay off any debt that I may have and so that my future dependents could be supported if I die.

Should I Purchase Life Insurance?

Some people may choose to purchase life insurance for a number of reasons. Creating life insurance goals is one place that you can start when you creating estimates for how much life insurance you may need. A thorough insurance agent will go through your goals to help you understand what options are available.

People purchase insurance to provide a financial buffer for their dependents in the event of their untimely death; others may be required to have a policy for mortgage purposes, which can then be used to pay off the mortgage if they die; some may choose to get life insurance because they want to financially protect themselves in the event of an accident or critical illness; and others may want to cover their final expenses such as funeral arrangements, estate legalities and unpaid medical bills.

Estimating Life Insurance Needs

To estimate how much you will need for life insurance is a complex activity that depends on several factors. These factors include whether or not you are single; if your spouse is employed or a stay at home; if you have children or other dependents like a parent or grandparent. There is also the question of whether you are the sole breadwinner or if you are one of several persons who contribute to the household.

Multiply Your Income

There is a basic approach that can be taken when estimating life insurance needs. If you are a single person with no dependents, one suggestion is to multiply your annual income by eight, nine or ten times. If it’s you and your spouse, this formula can also be applied, as long as your spouse follows the same formula. For families with children, each parent should follow the previous formula and add $100,000 per child for college or any other expenses.

Detailed Needs Analysis

Another approach is to use the Detailed Needs Analysis (DNA) test that builds on multiplying your income. The analysis requires that you look at your financial commitments to get a better view of your life insurance needs. To begin, you should identify your short-term needs; identify your long term needs and identify any new obligations that may come up in the future and sum the total. After this, you have to subtract all of your liquid assets, which are items that can be sold quickly. The resulting figure is the life insurance that you should purchase.

The DIME Method

The DIME Method is often used to estimate how much you will need for insurance. DIME is an acronym that stands for Debt and Final Expenses; Income; Mortgage and Education. Debt includes all outstanding debt except mortgage debt, whether it be loans, car notes or credit cards; income refers to how much you make and your contribution to the running of the household; mortgage refers to the balance owed on your current mortgage; and education is directly related to how many children you have and their education needs whether it be primary, secondary or tertiary education. When you add up these figures and subtract your liquid assets, this will tell you how much you need for insurance.

Life Insurance Needs Calculators

Because it’s very important that you find the right number that adequately represents your situation, you should consider speaking to a qualified insurance agent. In the interim, you can use one of these calculators to determine what your ideal insurance number is.

1. Estimate Life Insurance Needs (Standard)

To calculate one’s life insurance needs, this calculator asks you to input your income needs which include your income; your major expenses which include final expenses and loans and debts and your assets which include savings and investments.

2. Life Insurance Calculator (Bankrate)

This calculator takes several factors into consideration when estimating life insurance needs. And to estimate how much you need for life insurance, it assesses several factors that include how much money you will need for burial expenses and whether or not you have children.

3. Calculate Your Needs (Life Happens)

Life Happens explains that the real question that should be asked when purchasing life insurance is how much your family will need at the time of your death. As a result one of the key figures you are asked to input is the total annual income your family would need if you died today.

4. How Much Life Insurance Do I Need? (Smart Assets)

This simple calculator from Smart Asset also takes the approach of taking what your family’s needs are in the event of your death. It asks you to enter how much money your want your family to receive and how many years of income would be needed.

5. Insurance Calculator (Money Control)

Money Control’s insurance calculator uses several variables to calculate how much life insurance you need. These variables are based on your current expenses and the “current wealth level” of your dependents. It also asks you to indicate whether your risk tolerance is low, moderate, high or extremely high.

6. Life Insurance Calculator (Confused)

To calculate the amount of cover required, this life insurance calculator by Confused looks at how much would be required to pay off your debts after you die. The amount owed on your mortgage and other debts, funeral expenses and how much your family would need to survive are all included in the calculation.

7. Life Insurance Needs Calculator (Financial Mentor)

The life insurance needs calculator on the Financial Mentor website creates estimates based on your personal situation. The final amount for life insurance is based on the amount needed for your emergency fund, estate expenses, current expenses and your spouse’s age.