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How Much Life Insurance Should You Carry?

This can be a very loaded question because every person will have unique needs. Depending on your yearly wages, housing situation, bills, family, and even the decision of leaving some extra for family members to live on. All these are questions that you will need to personally answer before even beginning to investigate getting a policy.

There are a couple of formulas that you can use to help narrow the decision down a little, which I will cover towards the end of this article. For now, though, you need to get a look at the aspects of your life than can affect how much coverage you need, according to levels based off society in general.

  1. Income Replacement-If you are the only income for the family this section needs to be heavily considered. You will want to have a policy that will cover your monthly paychecks for up to a year. If you live alone this may not be a critical area to have covered because once you are gone there will be no need to continue paying for the cost of living.
  2. Mortgage-If you have family at all you may want to have coverage that will pay the balance off. Hopefully as you get older you will either have your home paid for, or you will have applied for a reverse mortgage to help with payments. If you live alone, it would not be as important unless you plan to let a family member have your home if something did happen to you.
  3. Large Debts-You will want to have enough coverage to pay off any large debts that you may have, rather than leaving it up to your family to deal with. This can include personal student loans, credit card balances, medical bills, or even vehicles loans. It is hard to judge exactly how much you will need to cover if you pay on them every month. It is best to add them all up at the time of getting the policy, if you plan to have them covered when you sign up with an agent.
  4. College Tuition-If you have children, it is definitely a good idea to have a large enough of a policy to cover the costs that they would need help with. This will allow your kids to continue their educations if you should pass away before they finish.

These four areas of your life need to be considered when choosing an Australian life insurance policy. Your life may demand a policy that covers them all, or many only one or two areas. That is something that you must decide for yourself. If you choose to listen to your insurance agent, you will more than likely be talked into coverages that you do not want.

There are two common formulas that you can use in choosing the amount of life insurance that you need. After you have decided on the areas of your life that you want covered, then you can plug numbers in and find your specific coverage amount needed.

  • Percentage of Income-Investopedia claims that you can use a basic formula to figure out how much life insurance you need, you will need to take your annual salary and multiply it by six to ten percent. Add the two numbers together and it gives you the lowest amount of coverage that you need.
  • DIME-This is the best way to calculate your needs because it gives you a more accurate number based upon your specific life. This formula uses everything that we covered above. Simply plug in the sections of your live that you plan to cover with your policy and add them together. As a reminder, the ‘D’ stands for the debt that you have. The ‘I’ stands for income replacement. The ‘M’ is for your mortgage and the ‘E’ is for college expenses.

The amount of life insurance that you need is up to what you want covered. Take the time to decide what your policy will pay for and then put the numbers that you have into the second formula. If you prefer to take your income and add a set percentage that will work as well, just make sure you have adequate coverage.


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How Much Life Insurance Should You Carry?

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