Thinking about what would happen in the event of your untimely death isn’t the cheeriest way to spend an afternoon. Unfortunately, it’s nothing compared to the financial struggles that families face when a loved one dies without life insurance coverage. This begs the question … “Well, fine! How much life insurance do I need?”
This answer has become a lot easier to answer with the rise of tech-forward companies like Ethos Life Insurance.
Ethos’ Marty Evans shared with us how getting life insurance can be as quick as setting up a Netflix account. Join us as we demystify calculating your life insurance needs and explain how to secure coverage easily.
How Much Life Insurance Do I Need?
One of the easiest ways to estimate how much life insurance you need is to multiply your annual salary by 10. For instance, if you make $50,000 a year, then taking out a policy for $500,000 is a good place to start.
But while the 10x rule is easy to remember, you don’t necessarily just want to slap an extra zero to the end of your salary and leave it at that. That’s where Marty advises using the DIME formula.
The DIME Formula
This handy formula delves a little deeper into your financial obligations to make sure you have enough coverage for your unique situation. DIME stands for Debts, Income, Mortgage, and Education, each of which is worth considering when calculating your end-of-life expenses.
While your mortgage will come into play a bit later on, the debt category is where you’ll want to factor in anything from credit card debt to student loans. You’ll also want to consider funeral expenses, which can add up a lot quicker than you think!
This is where you’ll want to take a look at your annual income and how long your family will need to rely on it. Keep in mind that this may change over time, depending on your age, family situation, and future changes to your current income.
Many people also choose to tack on the amount needed to pay off their home mortgage. This one’s definitely a worthy consideration, as it ensures that your family will have enough money to continue living in your home even if disaster strikes. (We’re all about that mortgage-free life here by the way!)
Last but not least, you may want to consider leaving money to help cover college tuition for your children or other family members. For instance, Marty shares that he contributes to his niece’s 529 plan each year to help save for her future college costs.
What About Stay at Home Parents?
A major drawback of the 10x formula is that it doesn’t help much when calculating the life insurance needs of a stay-at-home parent. Marty points out that life insurance is equally important for non-working parents, whose annual contributions have been projected to add up to “north of $180,000 a year.”
Assuming you don’t have additional family members in the area who you can rely on for support, there’s plenty to take into account when calculating the contributions of stay-at-home family members. This can include everything from transportation and child care to future earnings potential.
If the unexpected should occur, life insurance policies can go a long way toward ensuring that surviving family members are able to take the proper time to grieve without having to jump right back into work. It’s always worth considering that how much coverage you need may change over time. That’s why Marty recommends revisiting your coverage policy at least once a year to make sure it’s still a good fit.
How Long Do You Need Life Insurance?
There may come a day when you’ve accumulated enough wealth to cover your final expenses and leave your loved ones a healthy cushion with no need for an additional life insurance death benefit. So who exactly needs life insurance and for how long?
Obviously, the answer may vary on a case-to-case basis. But, in general, you may want to consider buying life insurance if you:
- Care for young children or aging parents
- Have a stay-at-home spouse who depends on your annual income
- Have mortgage payments that your beneficiaries might not have enough money to cover without your current income
Marty also advises that adults entering their prime earning years (usually between their 40s and 50s) may want to get particularly serious about buying life insurance. There may come a day when your kids’ college expenses are covered, your mortgage is paid off, and you’ve got more than enough to cover your final expenses and then some. But until then, it’s vital to have a solid backup plan!
Different Types of Life Insurance
Not all life insurance policies are created equal. While you’ll want to speak to your financial advisor about how to pick the right one for you, we’ll give you an overview of the two most common options.
Term Life Insurance
As we discussed above, you may not actually need life insurance for your entire life. Term life insurance accounts for this by only offering coverage for a specific length of time, whether it be 10 years or 30 years.
While it’s typically a lot cheaper, term insurance is designed to expire at a certain point, ideally when you have far fewer financial obligations. Should you pass away during the specified term, the insurance company will pay out to your beneficiaries. But should you outlive your policy and choose not to renew it, you’ll want to make sure you have enough money tucked away to cover any future expenses.
Whole Life Insurance
Whole life insurance is a common type of permanent life insurance that’s designed to last (you guessed it) your whole life, as long as the monthly premiums are paid. While it tends to be a bit pricier than term insurance, whole life insurance also comes with a guaranteed death benefit amount, as well as a cash value component.
Basically, a portion of your monthly premiums are set aside toward the cash value, which then accrues interest on a tax-deferred basis. Whole life policies more or less combine the idea of life insurance and investing and allow you to withdraw or borrow from them throughout your lifetime.
For most people, a term life insurance policy is the best value as there tend to be more effective ways to invest your money (outside of insurance products). Of course, this all depends on your unique financial situation.
How Ethos Makes Life Insurance Easier Than Ever
Despite the risks, many Americans have never taken the time to secure a life insurance policy. Traditionally speaking, the reasons why haven’t been that big of a mystery.
Back in the day, life insurance companies used to require potential customers to complete medical exams, hand over blood and other bodily fluids for testing, and then wait for months just to find out if they qualified for coverage. Luckily, Marty explains that Ethos Life Insurance is “really leveraging technology to solve many of these challenges in the life insurance space.”
When you log onto Ethos, he says, you can “get what you need quickly and easily.” So how quickly and easily are we talking?
How to Get Life Insurance from Ethos
Here’s a quick breakdown of what it takes to purchase a life insurance policy from Ethos, step by step.
- Go to the Ethos website
- Answer a few questions about your health and lifestyle
- Don’t worry about medical exams or blood work because none are required
- Select the right plan for you
- Purchase it online, all in about ten minutes.
Yep. That’s it. You can literally buy life insurance quicker than you can take a quiz to find out which Harry Potter house you belong to.
“It’s probably going to shock you how easy it is,” Marty laughs. “It feels like you’re answering a few questions. And then all of a sudden, you’ve done something that you might have been putting off for years.”
He goes on to explain that, as you answer each question, the Ethos system is working behind the scenes to match you with a list of proprietary products that it has developed with four major life insurance carriers. By matching you with the best choice for your needs, Ethos is able to offer coverage to over 95% of all households.
How Much Is Life Insurance Going to Cost Me?
If you’re retaining your skepticism on financial grounds, then Marty’s some great news for you. You may be among the many customers that Ethos regularly comes across who assume that life insurance is way more expensive than it actually is.
Let’s imagine for instance that you’re a 35-year-old, healthy non-smoker who pulls in $50,000 a year. Ethos could offer you half a million-dollar coverage for around $20 a month. For the price of a few lattes, you too can enjoy the peace of mind that comes with knowing your family will be protected, no matter what life may bring.
Final Thoughts on How Much Life Insurance Do I Need?
The hard truth is that we’re all going to pass away eventually. If you have people in your life who rely on your income, it’s important to have life insurance. That way, you’re protecting them from the unexpected.
Ready to get started? Head to Ethos to get coverage your family can rely on in ten minutes or less.