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Term Life Insurance? How Much Do I Really Need?

The best use for Term Life Insurance is to protect your home and growing family. Still, you may have put off purchasing it because you don't know how much to buy, and you are worried that an unscrupulous agent will talk you into a ridiculously high amount just to give himself the higher commission.

That could happen. However, most people are grossly under-insured rather than over-insured. The tendency is to ask what you own on your mortgage and try to get you to take enough to pay that off. The problem with that approach is that your family has to survive and pay other bills even if the house is paid for. When you are ready to buy Term Life Insurance, you can use our easy calculator to estimate just how much you need.

In the meantime, here is an easy way to do it using some old fashioned technology–the good old American dime. Use the letters of the word: D–I–M–E.

D: "D" stands for death. That's the one thing we can all be sure of. No one has figured out a way to conquer death, although alchemists and wizards have certainly tried. They failed, miserably. In fact, the further back we go in history, the more dead people we find. How much does it take to pay for a death in your area? It will be somewhere between $6,000 and $11,000 depending on whether you want cremation, already own your plots, etc.

I: The letter "I" is for Income. You are living on your current income. So figure your annual income (do this separately for your spouse); that is the amount your spouse will be giving up if something happens to you. The experts tell us that it takes a spouse at least five years to pull the family's life back together and adapt to a different life style, so multiply your annual income by 5.

M: "M" is for mortgage and any other outstanding debt such as credit card debt, medical bills, car loans, and so forth. Add these together.

E: This is the one people often forget. What will it take to provide education for your children and possibly for your spouse. People often forget to plan for the education of the spouse, but if he or she has health insurance under your employer or is a stay at home parent–or simply has a lower paying job due to less education, the spouse may need to return to college in order to earn a salary that will maintain the standard of living your family is used to. Add the numbers together, and you might have something like this:

D: Funeral Expenses....8,000
I:   Income multiple (40,000 x 5).... 200,000
M: Mortgage & other debt....150,000
E:  Education (15,000/yr tuition at a state college....60,000

Insurance needed in this example....418,000

To round it up slightly, in this scenario you would need $450,000 to $500,000 in Term Life Insurance to sleep well, knowing that your family would be adequately provided for at least for five years after your death. If you have very small children and don't want your spouse to have to send them to day care or take a regular job until they are at least all in school, you may want to multiply the income by 10 instead of five.

Term Life is very inexpensive. The one drawback is that it will terminate at the end of the term–usually 20 years. Getting whole life at that time will be expensive, but there is a solution. Purchase a Universal or whole life in the amount that would pay final expenses and leave something for a spouse or other heirs in your senior years. This might be as small as $50,000, which is quite reasonable when you are young. Then purchase a Term Rider–which can be any face amount. When you are older and the rider expires, you will still have the whole life to continue to the day you die. In the meantime, your family is fully protected and will get both the whole life amount and the term face value if something happens to you.
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