One of the first stages of purchasing life insurance is determining the coverage amount you will need. The most effective method to approach purchasing life insurance is a part of a more extensive financial strategy. A financial adviser can assist you in identifying gaps and strengths in your present position and where you want to go in the future. After considering how life insurance will fit into the overall picture for you and your family, your choice of the optimum policy amount and type may differ from what you had initially planned.
Why Do People Buy Life Insurance?
People buy life insurance for many reasons. However, they are based on one or more of these factors: â€Â¢ Protecting dependents against the economic effects of an untimely death; â€Â¢ Providing for additional income in retirement because of reduced Social Security benefits or pension plan at work; â€Â¢ Providing funds to pay estate taxes, maintain the value of the family home, or continue education beyond high school; â€Â¢ Providing liquidity for significant purchases such as real estate or a business.
What Type of Policies Are Available?
There are two basic forms of life insurance: 1. Term  Life insurance that provides coverage only for a limited time, with premiums paid at regular intervals. While there is an expiration date on the policy, you can renew it when the current term expires in most cases. The benefits you will receive under this plan are generally guaranteed and not subject to change. You are, however, required to pay premiums for the entire life of the policy. 2. Premium payment  Life insurance with flexible premium payments ensures that you will be able to provide coverage throughout your life at a cost you can afford. These policies allow you to make regular or irregular premium payments based on your income and cash flow needs. Although these policies are generally not guaranteed, they may become renewable after receiving five consecutive premium payments.
Where Can I Get Life Insurance?
You can purchase life insurance from commercial companies, fraternal societies, and other organizations or through a life insurance agent or broker. When purchasing term life insurance, you should consider the reputation of the company, its financial condition, the types of policies it offers, its location, and financial rating.
Calculating How Much Life Insurance You Need
â€Â¢ Monthly Income  The first step in determining your monthly income needs is how much you currently earn. Make sure you include all income, including any side or additional jobs. It is important to remember that life insurance benefits are generally paid in a lump sum upon the insured person’s death. Therefore, your beneficiary will not receive payment for one month’s salary if you make the payment at the end of two months’ worth of work. â€Â¢ Family Expenses  Once you have determined how much your family needs, list all monthly expenses. These include rent or mortgage payments, food, utilities, clothing, insurance premiums (auto, health, homeowners/renters), transportation costs (car payment plus gas and maintenance plus car insurance), education (college if applicable), entertainment (including memberships in fraternal societies, unions, and clubs), medical costs from co-pays to prescriptions, life insurance premiums (if applicable), and any other monthly bills. â€Â¢ Discretionary Expenses  List all monthly expenses once you have determined how much your family needs. These include entertainment for your family (including memberships in fraternal societies, unions, and clubs), vacation costs, medical costs from co-pays to prescriptions, life insurance premiums (if applicable), gifts to family members or friends, contributions to your church, favorite charity or others, and any other monthly bills. Note: The most common mistake made when determining how much life insurance you need is to neglect to include discretionary expenses in your family’s budget.
The DIME Method
This acronym (DIME) determines how much life insurance you need. It stands for Debt, Income, Mortgage, and Education expenses. Here are some examples using the DIME Method: â€Â¢ Debt  Include credit cards, auto loans, home equity lines of credit, and any other outstanding balances. â€Â¢ Income  All potential income from a job or a business should be included in this number. This would include bonuses, commissions, tips, and overtime. Retirement funds should also be included here if you plan to use the money to pay expenses upon your death. â€Â¢ Mortgage  This includes the amount still owed on your current mortgage or other outstanding loans that secure real estate. Include your down payment in this section if you do not have a mortgage. â€Â¢ Education  Education costs for children should also be included here if you plan to use the money toward their education. Calculate your costs by adding them all together and dividing that figure by the number of months you want to pay them for  this is the amount of monthly premium you must pay. The DIME approach is a wonderful place to start when determining your life insurance needs. Still, it does not consider any existing financial resources that your family may be able to use to cover expenditures. It might result in you being over-insured on your own.
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