Not sure how much life insurance to buy? Try this simple formula to find out

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This formula can be the key to getting the right amount of life insurance.

Key points

  • Buying life insurance is important to protect loved ones.
  • When buying life insurance, it is important to decide how big the death benefit should be.
  • A simple formula called the DIME method can make it easier to determine how appropriate life insurance is.

When buying life insurance, consumers must make a crucial choice during the process of acquiring their policy. They have to decide how much to make the benefit of their death.

Policies with higher death benefits have higher premiums, so it’s best not to make the death benefit greater than necessary. But if the policyholder dies, a larger amount of money will be paid to the beneficiaries if the death benefit is higher. So the trick is to make sure that the amount of death benefit you provide enough protection, but not too much.

There are many approaches to deciding on the right amount of life insurance. An easy shortcut involves multiplying income by 10 and buying a policy for that amount. But there is actually a simple formula that can be really effective in getting the right size at death. Here’s what it represents.

Consider the DIME approach when buying life insurance

When buying life insurance, the DIME formula can make it easier to determine the appropriate death benefit. DIME means:

  • Debt
  • incomes
  • Mortgage
  • Education

When you follow this formula, it means that the death benefit must be large enough to cover:

  • The total outstanding balance of each debt which is accumulated by the policyholder
  • The total amount of the policyholder’s income to be replacedbased on how much they have earned and how many years their income will be calculated by surviving addicts
  • The total outstanding balance of all mortgage loans on property owned by the policyholder
  • The total estimated cost of education for all children the policyholder has

It is usually easy to get exact numbers for these items. As a result, using this formula can help consumers who buy life insurance determine exactly how much coverage is needed to cover their remaining debts if they pass – and provide for the people they leave behind.

Why this formula can be a great way to get the right amount of coverage

The DIME formula can be a much better way to find out how much life insurance is appropriate compared to shortcuts such as multiplying income by a certain number.

The simple reason why the DIME formula is such a good approach is that it takes into account each person’s unique situation. Someone with more children, for example, is likely to need more life insurance than someone without children because children can be expensive to educate.

Similarly, a person with a large mortgage loan will need to make sure they have the money to repay the loan to allow the house to stay in the family, while someone without a mortgage may not need as much coverage. A method that simply multiplies income will not take these factors into account.

The reality is that the purpose of purchase life insurance is to provide for the unique needs of survivors who are abandoned. And ensuring that loved ones can keep their home, cover their debts and get an education are key components in providing for people who have to deal with the untimely death of a family member.

It is worth the effort to make this calculation and take a personalized approach to deciding on death benefit in life insurance, because once death has occurred, it is too late to go back and get more coverage.

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