When considering a life insurance policy, the benefit amount is often the first thing one thinks of. The benefit amount, also called the face amount, is paid to your beneficiaries after you pass away. How much life insurance you need is determined on a case-by-case basis. Factors include your income, your risk profile, the financial needs of your loved ones, and more.

You have a lot to think about when you’re looking for the right life insurance policy. Insurify can help lighten the load. Answer a few questions like your age, residence, and coverage needs, and Insurify will provide a list of life insurance quotes from the best life insurance companies for you to consider, in minutes.

How Much Should I Insure My Life For?

Before pinpointing the amount of life insurance you need, you should be clear on the type of life insurance you’ll need. There are two main types of life insurance, whole life insurance and term life insurance. Whole life insurance is permanent life insurance that lasts your entire life, and term life insurance lasts for a number of years and then expires.

Whole Life Insurance

A whole life insurance policy is any type of permanent policy that grows cash value. These policies are classified by the way they grow cash value. Traditional whole life policies grow cash value at a guaranteed rate in the insurer’s general account. Variable life insurance, another type of whole life insurance, grows cash value in investment sub-accounts owned by the policyholder, and its returns depend on market performance.

Term Life Insurance

Term life insurance is usually less expensive than whole life insurance. It does not have a cash value component and only lasts for a term length, from as short as one year to as long as 30 years, or until you reach a certain age. If you pass away during the term, the policy pays the face amount. If you outlive the policy, it expires without a benefit payout. Most term policies can be renewed without evidence of insurability, with a premium increase.  

Calculating Your Life Insurance Coverage

Most insurance agents will use a life insurance calculator to determine the amount of coverage you’ll need. Traditionally, there are two different approaches that agents use to calculate life insurance coverage needs, the human life value approach and the needs approach.

Human Life Value Approach

One of the first ways to decide a suitable amount of life insurance for a family was created by Dr. Solomon S. Huebner in 1924; it’s called the human life value approach. This method determines the death benefit by assessing your net future earnings, minus taxes and your living expenses until retirement, then discounting that into a present-day lump sum using a reasonable interest rate.

Discounting is a way of converting a predicted amount of money to a present-day equivalent. This handles the issue of dollar depreciation—$100 today may not be as valuable as $100 in the future. For example, $1 in the 1950s is about $10 today. 

The human life value approach is flawed because it doesn’t take into account the actual needs of your loved ones. It excludes funeral expenses, possible wage increases, and inflation. This could leave you underinsured and your family without enough to cover their needs. The needs approach is more widely used today.

Needs Approach

When deciding how much life insurance you’ll need, insurance agents use the needs approach to look at your current and future finances more in-depth than with the human life value approach. Your life insurance agent will gather thorough information to determine a lump-sum amount needed upon the insured’s death and the ongoing income needs of their loved ones. Your agent will need to know:

  • Your current annual income
  • Your assets and debts
  • Your current and future expenses
  • Your financial goals
  • Your risk profile

Lump-Sum for Final Expenses

Instead of reviewing your annual salary for a broad number, the needs approach is a detailed review of your finances to ensure that your immediate and future needs are met. A lump-sum benefit will enable your beneficiaries to pay for critical expenses like funeral costs, estate taxes, and credit card debt. Funds would also be available for any other urgent needs, like paying your mortgage, dealing with emergencies, or setting up a child’s trust fund. 

Income Replacement

If you are the primary earner in the family and your partner is a home parent, your surviving beneficiaries will most likely also need a stream of income to maintain a standard of living. Expenses such as childcare, food, clothing, and transportation are typical ongoing family needs. Social Security payments will cover some of your family’s lost income, but only for a limited time. A needs assessment will estimate your family’s continuing needs. 

Additional Financial Needs

Lump-sum and ongoing financial needs are types of survivor protection that are covered in the needs approach. Additional insurance may be purchased for more expensive needs or other personal uses, such as estate creation, cash for living benefits, and long-term care. Some insurers offer an accelerated death benefit that will pay a portion of your death benefit should you face a terminal illness.

How Much Life Insurance Do I Need? Is There a Rule of Thumb?

Before you meet with an insurance agent, it is good to be prepared and do your own analysis of your life insurance needs. There are different methods to use for varying degrees of coverage, depending on if you are looking for a broad number to start with or you would like to account for your more specific needs. 

Multiply Your Income by 10

Most financial planners recommend that you buy at least 10 times your annual salary in life insurance. You can use more or less depending on the number of years you think your dependents will need the financial support. This method does not account for any existing insurance (like a group insurance package) or your savings and investments. It also does not itemize your financial obligations.

At-Home Needs Analysis

You can re-create a needs analysis at home to calculate your life insurance coverage needs. Take your current income and multiply it by the number of years you want to replace it for your beneficiaries. You’ll also have to average your accumulated assets and liabilities. Your assets include savings, investments, and group life insurance; subtract this total from your coverage.

Your liabilities are the important expenses that will need to be maintained after you pass away. This includes your mortgage balance, car loans, personal loans, college tuition for your dependents, and funeral expenses. Also, think of your current expenses that will need to be preserved for your beneficiaries, like medical expenses, food, transportation, and clothing. This will be added to your coverage.

When doing a needs analysis with your insurance agent, you’ll be asked about your financial goals and risk profile. Though your financial goals pertain to the type of policy you buy, such as if you’d like cash value for retirement, you should consider your risk profile when thinking of the amount of coverage to purchase.

Risk is the chance of a loss; in life insurance, the chance that your income will be lost due to your death or a terminal illness is what’s being insured against. Your risk profile analyzes the chance you will pass away or become ill. Think of your age and health history. Will you need a sum of money to cover a projected illness? A hybrid life insurance policy or accelerated death benefit pays part of your coverage if you become terminally ill.

The DIME Approach     

DIME is an acronym for debt, income, mortgage, and education. It is similar to the needs approach, except it leaves out an important factor when calculating your life insurance needs, your accumulated assets. This approach also bypasses your daily living expenses, which could be covered by your assets.

The D in the DIME approach adds your debt, including credit cards and estimated funeral expenses, but leaves out your mortgage. Multiply your income by the amount of time your beneficiaries will need ongoing financial support. Calculate the amount you need to pay off your mortgage. And finally, estimate the cost of sending all your children to college. Add the four sums together to come to your coverage amount.

Is $250,000 Enough Life Insurance

All the approaches that a life insurance agent may use or the methods that you can use at home are a good way to estimate how much coverage you need. The quickest way to determine if $250,000 is enough is to divide it by the number of years you think your loved ones will need to replace your income. That should rule out whether it’s too low or affirm that it’s at least a good starting point.

Let’s look at some examples. If you make $50,000 a year and are considering a $250,000 death benefit, that would equal five years of income, which usually isn’t enough. It would exclude important expenses, such as your mortgage and your children’s education. You would essentially be leaving these expenses to be handled by your survivors. 

However, if you make $25,000 a year, your family would have a stream of income for 10 years. But this still excludes critical expenses. If you plan to support your beneficiaries with your income for five years and they will have enough to cover the mortgage and your dependents’ college education, this would be enough life insurance for you.

Insurify is a life insurance comparison tool that helps you decide which life insurance company is best by providing a list of quotes from leading insurers. It only takes a few minutes, and you can either apply online directly or speak with a representative from the companies you choose.

Frequently Asked Questions

Is $100,000 enough life insurance?

It depends on your income and the important expenses you do not want to leave behind to your loved ones. Most insurers, when analyzing your life insurance needs, account for income replacement, funeral costs, debt, and your current and future expenses. If $100,000 is enough to cover those needs, then it is considered enough life insurance.  

How much life insurance do you need to replace lost income?

The rule of thumb when replacing your income for your beneficiaries is to multiply what you make annually, after taxes, by the number of years you want it to be replaced. Income replacement does not resolve your mortgage, unpaid debt, or funeral expenses.

How do I do my own needs analysis?

A favored method that you can do on your own to calculate the amount of coverage you should buy is the DIME approach. This approach stands for debt, income, mortgage, and education for your dependents. Calculate these factors and add them together to get a suitable coverage amount.

Conclusion

Life insurance is not inflexible. There is no hard-and-fast rule or a one-size-fits-all method to cover your life insurance needs. What’s best for your budget and the appropriate amount of coverage to ensure that your loved ones won’t see financial hardship vary from household to household. By preparing your own life insurance needs analysis, you can weigh the right amount of coverage for you.

Find the right policy with the best insurance company that suits your budget with Insurify. After you’ve determined the amount of coverage you and your family need, use Insurify to help you find the right insurer. Simply answer a few basic questions, including your coverage amount, and Insurify will prepare a list of quotes in minutes. 

Updated October 26, 2021

Aissa Martell is a licensed insurance producer in the State of New York. She is a creative writer and has been freelance writing for five years. She’s happy to share her knowledge of the insurance industry and its products.