When it comes to purchasing life insurance wether term or permanent, most people guess how much insurance coverage they need. We find that this method of buying life insurance leaves people either under insured or with too much insurance coverage costing them more than it should.
Buying term life insurance isn't one size fits all. What one person's insurable needs are would not be the same for the next person. So there are some things to consider to make sure you are getting the most for your money. The first thing you want to consider is the term length. Next, you want to figure out the amount of coverage you need. You can do this by using the formula below called D.I.M.E.
Keep in mind that the first quote that you get may or may not be the final quote. The final rate would be determined on your health, if you smoke and any riders that you add on to the policy.
Let's look at the length of term that you may need. Term lengths are 10, 15, 20, 25 and 30 years.
How do you decide what length of term that you need? People buy term insurance for many different reasons. They may buy term insurance to make sure their family will be able to pay off any debts such as a mortgage if the breadwinner of the family were to pass away.
In this case, they would purchase term insurance for the length of the balance of the mortgage. If the mortgage will be paid off in 15 years they would buy a 15 year term. The only drawback to this is after 15 years there would be no more coverage.
It's usually best to purchase term life insurance for the longest period of time (30 years) to make sure you are covered for the longest period possible.
Let's say the mortgage balance is $500,000 and will be paid of in 15 years, you could purchase a combined 30 year term policy that covers the $500,000 mortgage for 15 years and the next 15 years decreases in face amount to whatever your insurable need is. Let's say $50,000. Since your face amount lowers to $50,000 in the 16th year after the mortgage is paid off your premium will decrease as well.
Please keep in mind that a mortgage is not the only reason to buy term life insurance. This is just an example of how to use term insurance.
Amount of coverage needed
There is an easy formula to use when figuring out how much life insurance you need to be covered for. The acronym used is called D.I.M.E.
Debt and final expenses - add up all of your current debt such as credit cards, car payments. loans, etc. (Don't include your mortgage here.) Then add up the cost of funeral and burial expenses.
Income - take your annual income and multiply it by 10. If your income is $130,000 a year then you would need $1,300,000. This would give your family 10 years of your income in the event that you were to pass away. This will allow your family to live the same lifestyle that they are accustomed without having to sell the family home or move.