How Much Life Insurance do I Need?

Your earning power is one of your most valuable assets.  Few people realize that a 30-year old couple earning $50,000 annually will earn $1,750,000 (with no raises) by the time they turn 65!  It’s hard to believe, but it’s true.  So on top of the grief, what would happen to your family financially if you didn’t come home tonight? CB056552

Only life insurance can guarantee to provide the funds required to replace your earning power when you’re not there.  But how much is enough?  The  D.I.M.E. (Debt – Income – Mortality – Education) approach.  It’s simplistic, but it’s a good rule of thumb.  Here’s how it works:

  1. Debt:  Add up your debt (mortgage/credit cards/auto/other)
  2. Multiply your Annual Salary times the # of Years to Your Retirement
  3. Mortality:  Add Funeral Expenses and Medical Expenses
  4. Education:  Multiply Annual Cost times # of Years times # of children

Assume that a 50 year-old man with one child earns $50,000 annually.  Assume further that he has a $75,000 mortgage, is in good health and wants to send his child to college for four years.  Using the D.I.M.E. approach, he might consider purchasing approximately $900,000 in coverage.

  1. Debt:  $75,000 mortage +
  2. Income:  $50,000 x 15 years = $750,000 +
  3. Mortality:  Average burial cost = $10,000 +
  4. Education:  1 Child x 4 Years x $18,000 = $72,000

42-15655384If this sounds impossible, you can always get more specific in trying to identify the amount of income you’ll actually need to replace.  This technique tends to overestimate the amount needed for  income replacement, but it’s a good place to start.  Also, keep in mind that it’’s important to remember that something is always better than nothing.