Although life insurance plays a significant role in many estate plans, it can be difficult to know how much you need. You may have purchased life insurance when you were younger, and then not revisited the issue for years. At this point, you may need more life insurance or less, depending on how your life has changed in the interim. To point you in the right direction, the Los Angeles estate planning attorneys at Schomer Law Group, APC discuss how to decide how much life insurance you need.
Do You Have the Right Type of Life Insurance?
There are several types of life insurance policies that all offer advantages and disadvantages. The type that was right for you as an unmarried, childless 25-year-old may not be right for you as a married parent of four at age 40. The basic life insurance options include:
- Term Life Insurance. The simplest and least expensive option, term life insurance is purchased for a specific amount of coverage and a specific term. The premiums are fixed; however, the policy has no cash value. If the insured outlives the policy, or there is a lapse in premium payments, no benefits are paid.
- Whole Life Insurance. Offers a set coverage amount for the lifetime of the insured. Premium payments are usually fixed and more expensive than term insurance; however, you get a savings component that earns dividends from the insurance company.
- Universal Life Insurance. Initially purchased with a set coverage amount; however, you may have the option to increase the coverage down the road. Premiums may also be flexible once you have accumulated sufficient cash value in the policy and you can borrow against the cash value. A universal life policy, however, has a termination age. If you outlive the termination date your beneficiaries won’t be entitled to any death benefits.
- Variable Life Insurance. Combines life insurance with investing. Once you accumulate savings, those savings can be invested in stocks, bonds, or mutual funds. Premium flexibility is also available once you have sufficient cash value in the policy.
How Much Is Enough?
Just as the type of life insurance that is best for you may change over the years, the amount of life insurance you need may also change. While there is more than one way to calculate how much life insurance coverage you need, some common methods include:
- Assets minus debts. This is simple enough; however, it only covers your debts without leaving any additional funds for loved ones. Simply add up the value of all your assets and subtract the amount you owe in debts. Include at least a cushion for additional debts and/or funeral expenses.
- Assets minus debts plus future income. This is a variation of the first method. When calculating your assets, take your yearly income and multiply it by the number of years you wish to replace that income. Add that to your total debts and subtract it from assets. You will likely get a negative number that represents how much life insurance you need.
- 10 times your income. As it sounds, this method just takes your yearly income and multiplies it by ten to roughly estimate how much coverage you should have.
- 10 times plus $100,000. This uses the 10x your yearly income formula and adds an additional $100,000 per child for college expenses.
- DIME. The most complex of the formulas, DIME stands for debt, income, mortgage, and education. To use DIME, add the following:
- Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
- Income: Decide for how many years your family would need support and multiply your annual income by that number.
- Mortgage: Calculate the amount you need to pay off your mortgage.
- Education: Estimate the cost of sending your kids to school and college.
Contact Los Angeles Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about your existing estate plan, contact the experienced Los Angeles estate planning attorneys at Schomer Law Group APCby calling (310) 337-7696 to schedule an appointment.