Calculating mortgage expenses to determine how much life insurance you need.
As discussed in the previous articles in this series, an individual can get up to 30 times their annual income (depending on their age) in life insurance. That means if you’re earning $100,000, you can qualify for up to $3,000,000 of life insurance.
The big question is how much insurance do you actually need? For most people the example above is more than they need.
Mortgages have declining values over time, but many times individuals and families will leverage their mortgage for large purchases such as kitchen remodels or even taking loans to make down payments on second homes or rental properties.
Consider the following when determining how much insurance you need to cover:
- What is the current mortgage balance?
- How many years are left on your loan?
- Do you have any open home equity lines of credit?
- Are you considering purchasing a second home? If so, what does that timeline look like?
Add your the current balances for the above considerations and voila! you have your need. If you are like most homeowners your mortgage expense is your largest, so it is critical you are as precise as possible in defining this important component to determine the needs of your survivors in covering that expense.
An approach we like to determine life insurance needs is the DIME method. It is a simple calculation of the four most important areas that determine life insurance needs:
D – Debt
I – Income replacement
M – Mortgage expenses (this article)
E – Education
There are many other ways people use to determine their life insurance needs. Most use some simple calculation that includes replacing your annual income. We recommend the DIME method because it provides more specific estimates of your life insurance needs.