How Much Life Insurance Do I Need?

If you’re buying life insurance, one of your first questions is: How much life insurance do I need?

There are multiple ways to calculate the right life insurance coverage amount, but not all methods are optimal.

How Much Life Insurance Do You Need?

Your savings, debts, income, and family situation all play roles in figuring out how much life insurance you need.

You want a death benefit amount that will provide funds to cover the items your family will need money for. For instance, if you want insurance to replace your income if you were to die, you need a policy with a much higher death benefit than if you want a policy to simply pay for your final expenses and burial.

There are multiple formulas to figure out potential insurance needs, including multiplying your income by 10 and the DIME (debt, income, mortgage, and education) method. These methods don’t offer a full financial picture, though.

Another way to figure out your insurance needs is to use a life insurance calculator.

Calculate How Much Insurance You Need

Here’s an easy-to-use calculator to help you determine how much life insurance you need.

Manually Calculate How Much Insurance You Need

You can also determine your insurance need with this basic equation:

Add up the financial obligations you want to cover.

Subtract existing assets that can be used toward bills = Your insurance need

Here’s what you might include in financial obligations to cover:

  • Income replacement. Multiply the salary you want to replace for the number of years you want to replace it. You want this income replacement to cover current and future expenses.
  • A mortgage. You can include the balance of a mortgage so your family can stay in their home without fear of losing it If income replacement (above) would already cover mortgage payments and other expenses, no need to add more mortgage money.
  • Other large debts. Would your family struggle with other large debts if you passed away unexpectedly? If so, add those amounts to the total.
  • Children’s college tuition. Add tuition money to ensure your children can pay for college if you are no longer around. Here’s what you could include in “existing assets that can be used toward bills”:
  • You have existing life insurance. Subtract any other insurance that you already have. Be careful about relying on supplemental insurance from work though—it doesn’t go with you if you leave a job, so you can’t be sure you’ll have it later on.
  • Savings. Subtract any savings your family would use to pay expenses. You can include retirement savings such as a 401(k) plan, or leave it out of your analysis if your beneficiaries want to preserve that money for retirement years.
  • College 529 savings. If you have a 529 account with money for your children, you can subtract it from your insurance needs.
  • Funeral expenses. Many people want insurance to cover funeral and final expenses. Some people buy burial insurance if this cost isn’t part of a larger policy.

Other Methods for Calculating Life Insurance Needs

You may run across other methods for calculating how much insurance you need. These usually include:

Multiply Your Income by 10 Or by 5. Or by 17.

This rule of thumb is hard to pin down. We’ve seen many numbers attached to it. And this method likely won’t help you pin down an appropriate amount of insurance. It’s better to look at your total needs and subtract the assets your family could use if you pass away.

Multiply Your Income By 10, and Add $100,000 per Child for College Expenses

If you want your insurance policy to help pay for your child’s college tuition and other related expenses, multiplying your income by 10 may not be enough. For instance, if you make $90,000 a year and have two children, your total insurance needs would be $1.1 million with this method.

This equation may offer a simple strategy to determine need but doesn’t account for other expenses, assets, or unique situations. A life cover calculator will offer you a more accurate representation of your needs.

The DIME Method

DIME stands for debt, income, mortgage, and education. The method has you add up these amounts:

Debt. How much debt would you leave to other people? This could include credit card debt and student loans that aren’t forgiven at death.

Income. Multiply your income by the number of years you want to provide income replacement for your family. Some sites advise using the number of years until your youngest child turns 18, but we all know that kids often need financial help longer than that.

Mortgage. Add your mortgage balance to your running total.

Education. Add an amount that covers tuition, room, and board for each of your children who will go to college. Private four-year college costs an average of about $29,000 a year for tuition, fees, and room and board, according to the U.S. Department of Education. The DIME method is a good start for calculating a life insurance need, but it ignores existing financial resources that your family might tap for expenses. By itself, it could leave you over-insured.

Factors to Consider When Buying Life Coverage

Beyond debts, income, a mortgage, and education, think about:

  • Child care costs. Child care can put a strain on your wallet. Don’t forget to factor in those costs when buying life cover.
  • Funeral expenses. The national median cost of a funeral is $7,848, according to the National Funeral Directors Association.
  • Type of coverage. The two overarching types of life cover are term and permanent. There are multiple types of permanent life insurance policies, including whole and universal. You’ll need to decide if you want a term life policy, which is more affordable, or permanent, which can last for the duration of your life. Permanent life often also has a cash value component; you can tap into this money while alive.
  • Life coverage riders. insurance riders let you customize a policy with additional features or coverage. The available riders will vary by company and policy.

Why Do People Buy Life Insurance?

Most people own insurance because they want to leave enough money for beneficiaries to pay final expenses, according to LIMRA, an industry trade organization.

Reasons for buying life insurance            Percentage of population

Burial/final expenses                                 60%

Transfer wealth, leave inheritance           38%

Replace lost wages of a wage earner      28%

Pay off mortgage                                          25%

Gender and Generation Gaps for Life Insurance

There is a substantial gender gap in insurance ownership. While 51 million men need insurance coverage, nearly 12% more women (57 million) need coverage, according to the 2022 Insurance Barometer Study.

There’s not only a gender gap in life insurance. The study found that younger generations especially need insurance.

Insurance Need by Generation

Generation                                            Percent who say they need life coverage

Generation Z (born 1997-2003)              48%

Millennials (born 1981-1998)                    47%

Generation X (born 1965-1980)                 43%

Baby Boomers (born 1946-1964)                 30%

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