Determining the amount of life insurance varies for each family. There is no set number that is sufficient for everyone. This is because one specific number cannot determine the value of a human life. Also, just using a person’s income to determine the amount of life insurance is not enough. There are other factors to consider when calculating the necessary amount needed if the unexpected should happen.
In order to determine the proper amount of coverage, the family’s needs must be evaluated. A simple method that can be used to evaluate that need is the DIME method. Each letter in the word represents an area to consider that should be included in the total amount of life insurance coverage.
The “D” represents the amount of debt or outstanding financial obligations that a person has. This includes credit cards, car loans, student loans, co-signed loans, taxes and medical expenses. If a person is joint on any of these obligations, the joint person is still responsible for continued payments. If there is only one person listed on the obligation and the unexpected should happen, the balance of that debt will go against the estate. An estate consists of everything of value that a person possesses including real estate, vehicles, art collections, antique items, investments and any other assets. Before the beneficiary is given estate proceeds, outstanding financial obligations are deducted for the estate value and the rest, if any, is given to the beneficiary. This can be a long and painful process to go through after just experiencing the loss of a loved one. Having life insurance to cover outstanding financial obligations will help minimize that pain.
The “I” represents the annual amount of income that a person contributes to the household. Whether a person is the breadwinner of the family or not, his/her income is used to help in some way to manage the household expenses. To help the remaining family members to continue managing the household expenses as well as other family financial goals that have be set, that lost income will need to be replaced. Depending on the family dynamics, the lost income may need to be replaced for 10 additional years. Having life insurance to cover the lost income will help the remaining loved ones to continue managing the household expenses.
The “M” represents the mortgage balance that is owed on the home. If the unexpected should happen, the mortgage lender will still expect a mortgage payment on the first of each month going forward. Even if you are renting, rent will be due on the first of the month. If you didn’t include the rent amount in your expenses in the “I” section above, it must be included in this section. Having life insurance to cover mortgage or rent payments will help keep a roof over the heads of your remaining loved ones.
The “E” represents the anticipated education expense for the children in the household. The cost of college varies but you can estimate the cost to be $15,000 per year, per child. As a parent, you can ensure that your children are equipped with the necessary funds to pursue further education, which will help them be prepared to begin their careers of choice. If the unexpected should happen while your children are young, life insurance can be the source to fund the further education when the time comes.
As mentioned above, no specific amount of money can replace the value of a human life. However, there are financial burdens that you can avoid if you are properly prepared. Having life insurance for you and your family will help reduce those financial burdens as well as allow the remaining loved ones time to mourn and heal from the pain experienced by the loss.
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