NEW YORK, NY / ACCESSWIRE / October 15, 2024 / Life insurance can give parents added peace of mind by helping protect their families. However, deciding on the right amount of life insurance can seem daunting.
Things to think about include whether you have enough coverage from the death benefit, or the money your beneficiaries receive if you pass away, to help cover your income and your loved one's expenses over many years. However, if you get too much coverage, you may overpay on premiums and miss out on opportunities to save elsewhere.
This article explores some factors to consider when calculating life insurance for parents and a few methods you can use to estimate your coverage needs.
Four Factors to Consider When Calculating Your Coverage Needs
Consider the following factors when calculating your coverage needs:
1. Your Current Income
A key reason many parents get life insurance is to help their loved ones protect their income if they pass away. This is especially important if one parent earns most or all of their household‘s income.
By evaluating income, you can get sufficient coverage to ensure your loved ones can have help covering expenses in the event that you are no longer there to provide income. You may need to consider factors like inflation and seek a death benefit large enough to account for income increases to help protect against future costs. Try to evaluate other income-related factors unique to your situation, too.
2. Your Dependents
The number of dependents you have and their ages are critical to determining your life insurance needs. Consider their current financial needs and future goals.
For instance, if you have several young children, you may need substantial coverage to help protect them while they grow up and help pay for future goals, such as college tuition.
On the other hand, if you have children who are in college or have graduated, your coverage needs may not be as high. You might choose a smaller death benefit or leave them additional assets to help them pay for end-of-life costs.
3. Your Debts
Debts can burden your surviving spouse and potentially reduce the amount of your estate that your loved ones receive.
Add up all your debts, including your mortgage, auto loans, and credit card debt when considering coverage. Think about potential future debts as well, such as student loans for when your children go to college.
Additionally, it's wise to weigh coverage needs against interest rates. For instance, you may get enough coverage to help loved ones pay off higher-interest debts if they earn enough income to pay off lower-interest debts you may leave behind.
4. Your Anticipated End-of-Life Expenses
End-of-life costs can be high. Consider getting extra coverage to help loved ones cover these costs. A few end-of-life costs to keep in mind include:
Medical bills
Funeral expenses
Travel for hospital visits or funerals
Estate settlement costs
End-of-life expenses are an especially vital consideration if you're getting child life insurance. Getting a large enough death benefit can help eliminate financial stress while grieving.
Three Methods to Calculate Your Coverage
Here are three formulas, from simplest to most complex, for calculating coverage needs when getting life insurance for parents:
1. Multiply Your Income By 10 or 15
A common method for calculating coverage is to multiply your income by 10 or 15. This provides enough coverage to help provide for your loved ones for10 to 15 years.
For example, if you earn $50,000 per year, consider a policy with $500,000 to $750,000 in benefits.
This is the most straightforward approach, allowing you extrapolate your current income to help ensure your loved ones have a large financial safety net. However, this method may not account for inflation, changes in lifestyle, relocation costs, or unexpected expenses. If your income changes, you may need to increase or decrease coverage.
2. Use the DIME Formula
The DIME formula estimates your coverage needs using your debts, income, mortgage, and education costs.
Here's how it works:
Add up all debts, including your mortgage
Estimate the cost of each dependent's education
Determine how many years of support you want to provide your loved ones
Multiply your annual income by the number of years you want to provide support
For example, let's say you earn $70,000 per year. You have $10,000 in debt and a $100,000 mortgage balance. You have one child and estimate their future education costs will be $50,000 total. You want to provide 10 years of support.
The sum of your debts, mortgage, and education costs is $160,000. Ten years of your $70,000 annual salary is $700,000. Therefore, you'd need $860,000 in coverage to cover 10 years of income and all the costs and debts.
This method is more complex and requires some estimates. While it's simpler than a needs-based analysis, it can help you account for lifestyle expenses and other costs your loved ones may face.
3. Calculate a Needs Analysis
A needs analysis entails looking closely at all your current and future income, expenses, and other obligations. This is the most complex method and can take time to work through. Conducting a needs analysis may require assistance from a financial advisor. However, it accounts for more factors, which may make it more accurate and adaptable.
Applying for The Right Amount of Life Insurance
Many factors go into getting the right amount of life insurance. Income is among the most important since it can be a proxy for your household needs. However, you also need to consider your debts, your dependents' changing needs and goals, and end-of-life costs.
Formulas for calculating coverage needs can be a good starting point to help simplify the process. However, consider working with a financial professional. They can help you get the right coverage for your needs while finding the lowest rates.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.
Aflac life plans - 68000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.
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Senior PR & Corporate Communications
Contact: Angie Blackmar, 706-392-2097 or ABlackmar2@aflac.com
SOURCE: Aflac
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