Getting to the bottom on the amount of insurance you should buy.
As your life changes so will your needs. You could buy a home, get married, and have children, which is a far cry from living the single life. And as your life changes, you also have to consider what you need to do to protect your family if you should pass away. That might sound morbid, but death is a reality of life that has to be thought about as you carve out a path for your future. That’s why buying life insurance is an important part of smart financial protection. You’ll definitely be a lot more relaxed if you have a life insurance plan in place. But what is the right amount of coverage to get when purchasing a plan?
The Wyshbox Blog
- Understanding what life insurance is
- Life insurance payout 101
- Let’s summarize
Understanding what life insurance is
In case you’re unfamiliar with life insurance, here are the basics. Life insurance is a contract between you and a company that guarantees a lump sum of money to your beneficiaries when you kick the bucket. The cost of your premium, or the amount you pay every month, depends on your gender, age and health (among other factors). A relatively low charge can cover thousands of dollars worth of debt. Anything from private student loans to mortgages and credit card debt can be paid off, in case you die before you pay those bills. Your loved ones will receive a life insurance payout, which is basically a lump sum death benefit from the life insurance company.
Life is unpredictable so it’s important to make sure you have the right coverage and plan. Because even the cost of a funeral can be extremely expensive, incurring thousands of dollars worth of debt. So besides grieving your loss you don’t want your family to also worry about paying for the funeral.
Life insurance payout 101
You want to make sure the amount of coverage you buy can cover bills and any outstanding debt. According to some experts, you should purchase a plan that is 10-15 times your income. The amount of insurance you receive depends on your overall net worth, which includes your income. Someone who makes less than six-figures a year would qualify for a smaller policy simply because of their net worth. Also, even if you decide to purchase a plan with a specific coverage amount, it doesn’t mean it’s the ideal amount to have in the long run.
A good way to accurately calculate the amount you should get is by using the DIME method which stands for Debt, Income, Mortgage and Education. This way you can add all of your expenses together and come up with the ballpark total you want for coverage. It takes into consideration what you accrue on a monthly basis, but also the amount of debt you have for each of the DIME’s.
Understanding what life insurance payouts or death benefits cover is important for an overall financial life plan. Also consider what you can realistically afford, because if you don’t pay for your plan it will eventually become inactive and there will be no death benefit to leave to your family.
That’s a lot of information so here are some bullet points.
- Buy life insurance as an overall part of a financial life plan.
- Use the DIME method as a way to give a rough estimate of how much you need.
- Buy more coverage than you think you need to give yourself a cushion.
- Understand what exactly life insurance covers.
- Term life insurance is probably the best type of plan to buy.
As life evolves, your income will most likely grow which will mean your expenses will grow. You want to make your life insurance plan has a payout that covers foreseen and unforeseen life circumstances. Do your research and set a realistic goal.