How much life insurance do I need, and what type should I get?
Life insurance is a key part of any sound financial plan, but determining how much you need and what type of policy to choose can feel overwhelming. A helpful starting point is the DIME formula, which focuses on four main areas: Debt, Income, Mortgage, and Education.
- D: Debt and Final Expenses: When calculating your coverage needs, consider any debts you wouldn’t want your loved ones to inherit. This can include auto loans, credit card debt, personal loans, and other liabilities. Also factor in final expenses such as funeral costs.
- I: Income Replacement: Think about how much income your household would lose if you were no longer there to provide it. Even in dual-income households, replacing your income can be critical to maintaining your family’s lifestyle. Life insurance can fill that gap.
- M: Mortgage: If you have a mortgage, how much is left on the balance? Paying this off through life insurance can relieve your family from the burden of monthly housing costs.
- E: Education: If you plan to fund your children’s education, factor in the cost of private school or college. Including this in your life insurance coverage ensures those goals can still be met.
By adding up all four components, you’ll arrive at a coverage amount that helps secure your family’s financial future.
What Type of Life Insurance Should You Choose?
For most individuals and families, term life insurance is the most cost-effective and practical option. Term policies provide coverage for a specific period, typically 10, 20, or 30 years, and pay a set benefit amount if the insured passes away during that term. These policies are generally more affordable and easier to manage.
Whole life insurance, on the other hand, is more complex and expensive. While it can be useful in specialized scenarios like estate planning or business succession, it’s not necessary for the average household. Because of this, term insurance is often the better fit for most people.
Why It’s Important to Work with a Financial Advisor
Choosing the right life insurance policy and figuring out how much coverage you need can be complex. A financial advisor can evaluate your full financial picture, long-term goals, and specific needs to recommend the best fit for your situation. With the right guidance, you can feel confident knowing your family’s future is protected.
Need help deciding on the right life insurance coverage? Schedule a consultation with our team to create a plan tailored to your family’s financial goals.
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