This is an important question not just as an individual but as a customer too. This is because underinsurance might result in the family not being self-sufficient in case of any unfortunate incident and over-insurance means higher premiums at the cost of other necessary expenses.
The Insurance Thumb Rule
Most insurance companies suggest insurance coverage be around 10-15 times your income. This number has been agreed upon taking several considerations into view such as market returns, inflation, and average family expenses. In case there are any other liabilities, that should also be added to the insurance amount.
Another option is to take the financial need analysis approach. This approach helps in taking care of specific individual needs. Here, the main objective is that the coverage should be capable enough to take care of all the dependents’ needs should the breadwinner dies early.
Another method that is used to calculate the life insurance amount is the DIME method. Here, DIME is an acronym for Debt, Income, Mortgage, and Education. It is the sum of these factors that are taken into account when deciding the coverage amount.
While most of the methods take financial obligations into consideration, there are several other personal considerations that may come into play too. These may and will have a considerable influence on whether you have enough insurance or not.
- Dependents: The high costs associated with raising a child or caring for a parent is quite high. If the number of dependents is high, it will have a considerable effect on the policy coverage amount. After all, different circumstances have different insurance coverage needs.
- College expenses: For a person with kids, a college education is a major factor when it comes to deciding on a life insurance policy. With tuition fees increasing day by day, it is becoming more and more expensive to plan for educational expenses for the kids.
- Health and Age: Depending upon your health and age, insurance companies also factor in the amount needed as well as the length of your coverage. It is best to purchase a policy when you are young and healthy as it helps you in getting affordable for higher coverage.
- Everyday expenses: Do not forget about the important point of everyday expenses. This amount includes housing rent, annual grocery expenses, vacations, and other family activities. The cost of living changes over time so it is best to factor them in when deciding upon the insurance cover.
Remember, getting the right face amount and term length will help in ensuring a safe and secure future for your loved ones. After all, it is pivotal in the protection of the long-term financial health of your family and loved ones.