Accidents and life happen. Something may happen to you earlier than anyone would anticipate, so where would that leave your loved ones if you were gone? If you’re married with kids, would your spouse be able to compensate for the loss of your income, much less have the wherewithal to maintain a home, support the kids or put funds aside for their education or his or her own future retirement needs? The smartest thing you can do today is anticipate the needs of your family tomorrow.

Your commitments and risks are likely to change a lot between the ages of, say, 25 and 35. And the younger you are when you lock into terms of your life insurance policy – or the dollar amount the protection will cost each month over the number of years of the policy’s term – the less you will pay.

Many brokers recommend term coverage for those who need coverage for a certain number of years, with affordable premiums while they are accumulating their assets for retirement and other purposes. What can be tricky is deciding how long of a term and how much protection will be adequate for your needs. Terms span 30 years (the longest) to as short as 10. Among the considerations for each:

  • 30-year: This provides a long safety cushion, with flexibility for handling many of life’s milestones. It lines up with newlyweds’ interests, especially if there’s a new home and a 30-year mortgage at stake. For parents with young or special needs children, this term gives time to set up their financial futures. And for primary breadwinners, it provides peace of mind that financial support will be there even if you’re not.
  • 20-year: For those in their mid-to-late 30s, this term is just long enough to see their kids through to adulthood and/or pay off the mortgage, plus the premiums are lower than a 30-year term will cost. It’s a good option if you have debts beyond the mortgage you don’t want to saddle on your loved ones, and if you’re older, it will travel with you into retirement.
  • 15-year: Another option for protecting your pre-schoolers until their college years, this term can also be a good fallback should you not be around to help care for your parents or other aging relatives. It’s another safety net on your mortgage, too.
  • 10-year: This is not a “why bother?” option. It can be a great stop-gap protection. Say your horizon on retirement or financial independence is within 10 years. Or you need a less expensive policy while you work on your health so that a better policy with attractive premiums is do-able. It’s worth looking into.

What may be harder to figure is how much in life insurance will do the job. Formulas will vary according to your broker and/or financial advisor. Three popular rules of thumb:

  • The “10 times income” rule: This is somewhat outmoded as it doesn’t reflect your family’s needs in detail, your assets or other insurance and doesn’t provide a coverage amount for stay-at-home parents.
  • The “10-times your income + $100,000 per child for college expenses” rule: This adds more dimension to the original “10-times” rule, but still doesn’t do a deep dive into your family’s total needs, assets or other insurance.
  • The in-for a “DIME” rule: This rule is better than the others but still misses existing life insurance, savings and unpaid contributions of stay-at-home parents. DIME is an acronym for:
    • Debt – or everything plus an estimate of your funeral expenses but excluding your mortgage.
    • Income – your annual income multiplied by the number of years your family would need support.
    • Mortgage – the amount needed to pay off your mortgage.
    • Education – the estimated cost of college for each of your children.

The easy answer may be to determine your own target coverage amount by calculating your financial obligations, less your liquid assets. Regardless, what’s most important is to plan ahead and plan early. Life insurance is the best way to protect your future family and interests, no matter what happens.

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