Most people know that life insurance is an important financial investment; however, few are aware that their policies are lacking in the amount of coverage they need. Deciding on the right amount of coverage can be tricky; many personal factors affect how much or what kind of coverage is needed. Luckily, there are several common approaches and a wealth of easily accessible information that can help consumers decide how much life insurance to purchase.
Just over half of American adults have life insurance policies, and the percentage of policyholders has slowly dropped by 9 percent since 2011. Of those with life coverage, almost one-third only have group coverage, usually through an employer, which is rarely enough and typically contingent on the policyholder being employed by the company at the time of death. Of those insured, 40 percent say they regret not purchasing life insurance while they were younger.
When calculating the amount of life insurance you need, there are a few general rules of thumb that can help provide a starting place. None of these are hard and fast rules that will determine necessary life insurance amounts, but they may provide a framework to build upon when deciding how much life insurance coverage to buy.
Multiply your income by 10.
Many financial advisors of years past recommended that their clients invest in at least 10 times their annual income. While this isn’t a bad rule, it has become outdated due to interest rates and other aspects of the modern-day economy. This rule provides a rough starting point but lacks any insight into families’ specific needs or existing savings and insurance policies.
Multiply your income by 10 and add $100,000 per child for higher education.
This approach, like the first, is a great starting point. It includes the base ten years’ worth of income, the minimum most experts recommend and adds enough coverage to substantially lower children’s higher education-related expenses. More work is needed, though, to account for specific family needs and pre-existing assets.
The DIME Formula
The DIME formula encourages investors to take a deeper look at their finances and familial needs than the other two. The approach consists of four parts; debt & final expenses, income, mortgages, and education. By examining each of these aspects, policyholders gain a more well-rounded view of how much life insurance they need, but the DIME formula still does not account for any existing assets or savings.
When it comes to buying a new policy, the amount of coverage you need depends entirely on your family’s specific needs. The best way to ensure that you are taking out the right amount of coverage is to speak to a licensed agent. To speak with one of Empower Brokerage’s Life and Annuity experts today, call (888) 539-1633.
Life Insurance Questions?
We hope this information on how much life insurance you should invest in is helpful.
If you’d like to learn how we can help you plan your retirement, call Empower Brokerage to speak to one of our Life and Annuity experts (888) 539-1633.
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