How Much Life Insurance Do I Need? A Step-by-Step Guide to Determining Your Coverage

Did you know that 42% of American adults either need to obtain life insurance or increase their existing coverage? Understanding how much coverage you need is crucial to ensure your family’s financial security.

Life insurance is one of those topics we all tend to avoid. Thinking about the end of life can be uncomfortable — and this subject is easy to ignore, especially if you are in good health. However, if you’ve failed to properly protect your family, you could leave them in a very difficult position.

A financial advisor might address the issue by asking this question: If you passed away last week or last month, what would that mean financially for your family? If the answer is ‘not much,’ then you’d have little to be concerned about. That could be the case if you are single with no children or a young couple with no children where both individuals have good incomes and few financial obligations.

If the answer is anything but that, for your own peace of mind as well as the benefit of your family, spending time to determine how much life insurance you need is time well spent.

Consider a working couple with children. In this scenario, the financial obligations often mean that both incomes are crucial for the family’s wellbeing. Life insurance becomes particularly important in this context, as it ensures that the family can maintain their standard of living even if one parent’s income is lost. There are many other situations where life insurance can play an important role, but this is one of the classic cases… a family with children.

Calculating Your Need

The best way to get specific about the coverage needed in your situation is to work with a financial advisor for a comprehensive financial plan. This process will help you identify all your needs and the means to address them. A comprehensive plan takes into account various scenarios, such as maintaining good health, or facing health challenges, and living a long life or passing away prematurely. An advisor can develop customized solutions tailored to your overall situation. For those seeking a rough estimate without an in-depth financial plan, the DIME method is a useful alternative.

The DIME Method: Debt, Income, Mortgage, Education

This method involves adding your Debt, Income, Mortgage, and Education expenses.

1. Debt:
Consider all your outstanding debts, excluding your mortgage. This could include credit card debt, personal loans, or car loans.

2. Income:
Calculate ten years of your income. This can start to help you understand what financial gaps may occur if you were gone.

3. Mortgage:
Add the amount required to pay off your mortgage. Using life insurance proceeds to pay off a mortgage may help your family keep its home.

4. Education:
Estimate the cost of your children’s college education. You may want to use a range since costs can vary from school to school.

Here’s an example of how this calculation can work:

This is one way to ballpark what might be needed should you pass away unexpectedly. It is a simplified calculation that doesn’t take everything into account but can give you an idea of the potential shortfall.

For the next step, consider the insurance coverage you may already have.

How is that factored in?

Check Employer-Sponsored Coverage

You may have a group life insurance plan through your employer. If you have that coverage, find out exactly how much the plan will pay out and under what circumstances. Many employer-sponsored plans pay out a certain multiple of your annual salary. You may have an opportunity each year to select how much coverage you can purchase through your employer. The advantage of coverage of this type is that is typically very low cost. The disadvantage is that it is tied to your employer. In most cases, once you leave the company, you would immediately lose your coverage.

What About Other Policies

You may have purchased a life insurance policy at an earlier stage of life. As things change through the years, is it still the right amount? Is it the right type of policy? What might have been a good fit earlier may not be today.

The Value of Professional Guidance

How much coverage do you need to protect your family? How does life insurance fit into your financial plan? Life is an ever-evolving journey marked by significant milestones and unexpected changes. As life unfolds, your financial and insurance needs also shift.

Nothing can replace the experience and guidance of a financial professional who can guide you through the evaluation process. Life insurance is not a one-size-fits-all solution. It is a dynamic financial tool that may need to evolve with your life. Periodic reviews can help determine what your family needs, no matter what life brings your way.

Connect with OneDigital’s Wealth Management team to get in touch with a financial advisor and gain peace of mind about your future.

Investment advice offered through OneDigital Investment Advisors LLC, an SEC-registered investment adviser and wholly-owned subsidiary of OneDigital. These materials are provided for informational and educational purposes only and do not constitute a recommendation to buy, sell, or hold any security, nor do they constitute legal, accounting, investment, or tax advice. The materials and the information provided are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. All included information and data are limited only to the inputs and other financial assumptions indicated.