A. Below is a methodology you can consider:
When choosing a term life insurance policy, it is important to select a coverage period that best fits the time in which income replacement is needed. You pay level premiums (payments that do not increase) during the coverage period. When selecting a coverage period you may want to pick a period that is at least as long as the number of years in which your beneficiary can afford to retire.
I recommend using the DIME method to estimate the amount of term insurance you need:
- D: debt (exclude mortgage). How much debt (car loan, student loan, etc.) do you currently have?
- I: income (your income). How much will be the lost income if anything happens to you? Use 3-5 years or up to 30 years to estimate the amount of income your insurance policy will pay out to your beneficiary.
- M: mortgage. How much mortgage balance do you have?
- E: education expenses for your kids. Consider the growth of such education expenses. For example, if your child is at age 8, this year's average education expense is $50K per year, in 10 years, that amount might increase to $100K per year.
Add up the above amount, you will have a range of numbers for the insurance coverage you need.
You can also use our free online insurance amount calculator to do the estimation.