Life insurance is an important safeguard to prepare your family’s finances for the unexpected. But how much coverage do you actually need?
Calculate the right-sized policy for your needs
The amount of life insurance you need depends on your life stage, goals and budget. You can use a variety of methods to find the right policy size for you and your family:
The DIME method: A life insurance policy worth approximately 10 times your income is a popular guideline. With the DIME (debt, income, mortgage and education) method, you also factor in your current debts, your mortgage and potential higher education expenses for children in your calculation.
‘Ballpark’ method: You don’t need to start with a precisely calculated number. Start by estimating the number of years you anticipate working until you retire and then multiply it by your annual salary. For example, if you make $100,000 a year and have 10 years left until retirement, your ballpark coverage is $1 million.
Goals-focused: With this approach, use the financial goals you want life insurance to accomplish as a guide to determine the size of your policy.
Learn more: Apply for life insurance in just a few minutes
3 steps to use the goals-focused method
Determine the amount of coverage based on specific, identified financial objectives in three steps:
1. Clarify your goals
If you were to die in the next 10 to 30 years, what financial challenges are you most concerned about your loved ones facing in your absence?
Those might include:
Mortgage payments
Pay off debts
Afford daily expenses
Afford travel and hobbies
Have an emergency fund
Afford higher education
Pay for retirement
Pay for a funeral
Many of these life insurance goals look a lot like general financial goals because the purpose of life insurance is to replace economic value and allow your loved ones to maintain their current standard of living in your absence.
2. Put some numbers to it
Now that you’ve outlined your goals, figure out how much money is needed to get your family there. Use the longest time horizon on your list to figure out your term. For example, if the longest horizon is in 20 years when your spouse plans to retire, your term should be 20 years.
3. Work out what you can afford
Add up the total amount of money that will be needed over your term and subtract any savings from this number to get your coverage amount.
Start out by getting a quote for your ideal coverage and term. If the quote fits your budget, you can rest easy knowing you have everything covered. But if money is tight, consider these three strategies to stretch your dollar:
Federal programs: In some instances, the government pays death benefits to members of your family, so you can deduct those from your total coverage amount if you qualify. Make sure to factor in your spouse or partner’s income and only calculate your share that is needed.
Max out your coverage: Reduce your term to the years you feel are most critical for supporting your family — for example, while your children are young.
Revisit goals: Determine the single most important thing you want to insure is covered — and trim your coverage accordingly.
And don’t worry if you feel like the amount of life insurance you can afford now is insufficient. You can apply for a policy that works for now, and then adapt it over time as you are able.
Maximize life insurance to provide security for your family
Worrying about whether your family will be cared for when you’re gone weighs heavily on most of us. But purchasing the right amount of life insurance can give you peace of mind that your family will be provided for and able to accomplish financial goals, even in your absence.
Ally has teamed with Ladder to bring you a broad range of policies that fit a variety of goals and budgets. Use the Ladder life insurance calculator to get a quick and easy estimate of the amount of life insurance you should purchase and apply for term life insurance today.
Disclosures: Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see www.ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
