How Much Life Insurance Do I Need? All You Need to Know About Life Insurance

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 life 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 life 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.

Manually Calculate How Much Life Insurance You Need

You can also determine your life insurance need with this basic equation, 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”:
  • Existing life insurance. Subtract any other life insurance that you already have. Be careful about relying on supplemental life 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 in it for your children, you can subtract it from your life insurance needs.
  • Funeral expenses. Many people want life insurance to cover funeral and final expenses. If this cost isn’t part of a larger policy, some people buy burial insurance.

Other Methods for Calculating Life Insurance Needs

You may run across other methods for calculating how much life 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 life 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 life 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 life 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 insurance 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 Insurance

You may need more life insurance than you think. Depending on many other factors in your financial plan, your insurance needs change, which is why going only by broad rules of thumb can lead to being significantly under or over-insured.

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