Buying insurance often feels like legalized gambling. That is, it seems like you’re betting that the amount paid in using a direct deposit loan will be equal to or less than the amount paid out. The $200 a month health insurance cost doesn’t seem worthwhile until you end up in the hospital, then it’s a huge necessity. So, what about life insurance? It’s not much of a gamble since everyone dies someday. How do you determine what you need for the least cost and greatest benefit?
Use the D.I.M.E. Method
The most common method is referred to as D.I.M.E. That is, how much do you need in order to cover the cost of death expenses, replacing lost income, the mortgage on your home and any education your children might need. Now obviously those factors are going to change over time, so you will need to update your policy when you have major life changes.
The cost of death seems to be an oxymoron. However funeral costs can be steeper than you might expect, rivaling the cost of a wedding. In 2001, an average funeral cost about $6,000; ten years later, it’s closer to $10,000. That doesn’t include the cost of a cemetery plot or the burial itself. Additionally, if you die in the hospital or after a prolonged illness, there might be residual medical expenses. Your family shouldn’t have to absorb these costs after losing you.
The next concern is income replacement. Many families rely on both partners’ incomes to get by. What would happen if one income suddenly ceased to be available? It’s a risk anyway since companies fold and jobs end, but transferring a portion of that risk to an insurance company can make a difference to a family.
The M is for mortgage. Your family will already be distraught; you certainly don’t want them losing their home as well. Consider other debt too when figuring this amount. Insuring for sufficient money to pay off the mortgage means your family can stay where they are comfortable.
E stands for education, primarily college for your children, which is the final consideration in this equation. Higher education isn’t cheap and every parent wants to provide their children with a good start in life. An education doesn’t guarantee success but it’s a good beginning. Consider the age of the children and the number of years they’re likely to need to be educated.