How Much Life Insurance Do You Need?

You’ve decided to purchase life insurance — but how much do you need? After all, many factors can affect your life insurance coverage level, such as your number of dependents, current financial situation, and financial goals.

You could use an online life insurance calculator, but that may mean risking unwanted phone calls or emails. If you’re not yet ready to buy a policy, you can still get an estimate of how much life insurance you need.

This guide will explore useful methods for estimating the right level of life insurance coverage for your needs.

5 ways to calculate the amount of life insurance you need

There’s no one-size-fits-all method for determining how much life insurance you need. Over the years, insurance experts have developed many different ways to calculate your life insurance coverage needs.

Let’s walk through each calculation and discuss the type of policyholder best suited to use it.

10 times your income

In this method, you simply multiply your gross annual income by 10. For example, if you make $50,000 a year, you’d purchase $500,000 in life insurance coverage. This method is useful because replacing lost income is an important purpose of life insurance.

Good for: The multiple method is best for people who want a simple formula for figuring out their coverage. Because the only variable is income, it works well for policyholders who may not have as many debts or recurring expenses to factor into a life insurance policy.

Income x 10 + $100,000

Some insurance experts recommend purchasing coverage equal to 10 times your income plus an additional $100,000. The idea is this amount will allow you to replace your lost income for your survivors and have an extra cushion for important financial goals, like paying for college.

Again, this method has the advantage of being mathematically simple but may not be as exact as other methods.

Good for: This method is well suited for policyholders with dependents, with some experts recommending adding $100,000 per dependent. This method is also useful if your income comes with benefits that aren’t wage-specific, such as 401(k) matching or healthcare subsidies.^[1]

Income plus cushion

Due to inflation, your income today may not be as valuable as it’d be 10 years from now. In the best times, inflation is around 2% annually but can sometimes be much higher.^[2] Adding some cushion accounts for inflation.

Good for: Policyholders concerned about inflation should add a cushion. A cushion can also help your family pay for a funeral after you pass away.

DIME

The DIME method stands for “debt, income, mortgage, and education.” First, add up all your debt (student loans, car loans, etc.). Multiply your income by how many years you anticipate your family will need to replace your income. Then add up the cost of your outstanding mortgage payments. Finally, add in your children’s education costs.^[3]

Good for: This method is particularly useful for parents and/or homeowners, because it considers future tuition costs and mortgage costs in calculating how much insurance you need. It’s also well-suited for people who want a more exact, comprehensive calculation, compared to more simple methods.

Subtract current resources from future expenses

Similar to the DIME method, in this calculation you also add up all your future expenses. But then you subtract your current financial resources — such as a partner’s income or current savings — from these total expenses.

Good for: This method works well for people who have a partner who also earns a steady annual income. It’s also great for people who have some money saved and may be hoping these savings offset how much they need to spend on a life policy.

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Things to keep in mind when buying life insurance

The ultimate goal of life insurance is to protect your loved ones financially after you’re gone. But many factors affect financial stability, and your beneficiaries may face multiple costs.

You should keep the following things in mind as you determine your coverage needs:

• Final expenses: Your loved ones will need to handle funeral costs after you’re gone, so be sure to find a death benefit that can cover these expenses.

• Your age: Your income replacement needs will vary based on your age. Younger people will lose more potential income if they pass away, and vice versa.

• Ages of your dependents: A parent of a 3-year-old might want to multiply their income by 15 when determining life insurance coverage, while a parent of an 8-year-old might want to multiply their income by 10. Ideally, your life insurance policy should provide enough money to support your dependent children financially until they’re independent adults.

• Living expenses: People paying a mortgage or who deal with higher healthcare costs may need more life insurance coverage.

• Income replacement: If you have a higher yearly income, you may want more life insurance to offset future lost wages.

• Family situation: If you have more dependents, you probably have more expenses — especially when it comes to future education costs.

• Financial goals: People with loftier financial goals have higher future expenses — and a greater need for a robust life insurance policy.

• Workplace life insurance: Your employer may already provide you with some life insurance. Typically, life insurance through work is equal to one year of your salary, so you may need to buy more.^[4]

Types of life insurance to consider

The type of life insurance you buy is an important variable to consider. Your needs and budget will influence your decision about whether to purchase term life, whole life, or universal life.

• Term life: This type of life insurance policy lasts for a specific period of time, such as one, five, 10, or even 30 years. A payout only happens if the policyholder dies during the term. If not, coverage lapses and you may have the chance to renew. Generally, term life insurance is best for policyholders who want a simple, lower-cost policy for a specific amount of time.

• Whole life: Also known as permanent life insurance or cash value life insurance, whole life lasts for the insured’s entire life. Whole life differs from term life in that the policy builds cash value over the course of the policy period. Whole life insurance is more expensive than term life but can be cost-effective in the long term, depending on your financial goals.

• Universal life: A subcategory of whole life, universal life doesn’t require you to pay premiums on a fixed schedule — instead, you can choose a flexible premium payment pattern. This makes universal life best for people who have a variable income year to year (for example, freelancers) and might value flexible payment schedules.^[5]

How much life insurance costs

Generally, whole life insurance costs more than term life insurance. But many factors affect how much monthly premium you’ll pay, including your age, gender, term length, and coverage amount.

The following table provides example monthly premium amounts for term life insurance.

Factors that affect the cost of life insurance

Life insurance companies consider many rating factors to assess how likely you are to pass away. These rating factors affect your life insurance costs:

• 

  Age

  An older person generally has a higher likelihood of serious illness, which is why life insurance is typically more expensive for older people.

• 

  Gender

  Because men don’t live as long as women on average and are more likely to work more dangerous jobs, they tend to pay higher life insurance premiums.

• 

  Health history

  You’ll typically take a medical exam before getting life insurance. People with chronic illness, or a family history of illness like diabetes or heart disease, typically pay higher life insurance rates.

• 

  Personal habits

  An insurance agent will ask about personal habits when you meet about a life insurance policy. Habits that pose a health risk (for example, smoking or skydiving) will affect your premium.

• 

  Occupation

  People with riskier occupations, such as firefighters or construction workers, typically pay higher life insurance rates than people who work in less risky professions.

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