How much life insurance do I really need?
Quick Facts
Your life insurance coverage amount should factor in your long-term financial obligations
You can buy more than one life insurance policy to ensure your family can cover financial obligations once you are gone
When determining how much life insurance you need, it is best to include debt, income, mortgage, and education in your calculation
As the breadwinner, your income is necessary, meaning your loved ones could struggle to cover monthly expenses without your help. Life insurance ensures your family’s financial stability after you pass, so it is important to get the appropriate amount of coverage.
A good starting point would be calculating your financial obligations. However, figuring out precisely how much life insurance you need will take a bit more work.
Take a look at our guide below to help you determine how much life insurance coverage you need.
How to Calculate Your Life Insurance Coverage Amount
You have different ways to calculate your life insurance coverage amount. Some people opt for a more comprehensive calculation that requires them to look deep into their finances to get a more precise estimate.
If you are looking for more detailed calculations, you’ll use the following formula:
Financial obligations – existing assets = life insurance coverage amount
Your financial obligations include
Your annual salary multiplied by years of income to be replaced
College expenses
Funeral expenses
Remaining mortgage balance
Any additional debts
The cost of services to be replaced that are provided by a stay-at-home parent, such as child care
Existing assets include
Savings
Life insurance policies
College savings
Rather than using the above formula, you can save time by estimating your life insurance needs with a few quick calculations that don’t require you to pick apart your finances.
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How much life insurance do I need?
Who needs life insurance? The short answer is that everyone can benefit from life insurance coverage. If you’re wondering how much life insurance you should have, consider using one of the following formulas.
Multiply your annual income by 10. This replaces your annual income for 10 years.
Multiply annual income by 10 and add $100,000 per child. Building on the first method, this replaces your income for 10 years and adds $100,000 per child, ensuring your life insurance covers education costs for each of your children.
DIME formula. DIME represents the four most important areas used to calculate life insurance needs: debt, income, mortgage, and education.
Using the DIME formula, add up the following financial obligations.
Debts and funeral expenses
Annual income multiplied by the number of years being replaced
Remaining mortgage balance
Cost of education for each child
The DIME formula differs from the other two methods because it gives you a clear picture of your financial obligations. However, neither of the three methods mentioned takes your assets or the value of a stay-at-home parent into account.
What can life insurance be used for?
Life insurance can be used for the following.
Funeral expenses
Medical expenses
Debts
Probate
Income replacement
Charity donation
Inheritance
State and federal death taxes
Savings
Depending on what the life insurance will be used for, you’ll need a high coverage amount, which can drive up the cost of your policy.
What’s the difference between term, whole, and universal life insurance?
Choosing how much life insurance coverage you want is only part of the process. Since there are different types of life insurance, you’ll also have to choose which one to purchase.
Here are the main differences between term, whole, and universal life insurance.
The Difference Between Term, Whole, and Universal Life Insurance
Term Life InsuranceWhole Life InsuranceUniversal Life Insurance
Set coverage period, typically 10, 20, or 30 yearsNo set coverage periodNo set coverage period
Fixed premium and coverage amountFixed premium and coverage amountAdjustable premiums and coverage amounts
RenewableAccumulates cash valueAccumulates cash value
No cash valuePays out annual dividendsInvestment account that accrues interest
Age limitsNo age limitNo age limit
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Both universal and whole life are considered permanent life insurance. If you wish to save money by purchasing term life insurance but want the option to convert to whole or universal life later down the line, look into life insurance companies that offer conversion.
If you’re interested in learning how much term life insurance you need and much more, check out our Term Life Insurance Buying Guide.
What information determines my life insurance rates?
Life insurance companies may use the following information to calculate your life insurance premium.
Age. Getting insured at a younger age can get you a lower rate because the insurance company is less likely to pay out the death benefit soon after the purchase of the policy.
Gender. Women often pay less for life insurance because they have a longer life expectancy than men.
Health. Height, weight, and preexisting conditions impact life insurance premiums, as well as the results from a medical exam if required.
Driving record. Major traffic violations or incidents make a person risky to insure.
Family medical history. Certain genetic medical conditions that run in your family could make you high risk.
Credit score. Individuals with higher credit scores are seen as responsible, so they often have lower premiums than those with poor credit.
Type of insurance policy. Permanent life insurance is more expensive than term life insurance.
Amount of coverage. The more coverage you purchase, the higher your premium will be.
Occupation. Individuals with high-risk occupations, such as law enforcement officers or firefighters, pay higher premiums.
Lifestyle. High-risk recreational activities, such as skydiving, can result in high premiums.
Smoking status. Smokers pay higher premiums due to the possibility of them developing certain medical issues.
Since multiple factors are used to determine life insurance premiums, all policyholders have different rates.
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Tips for Calculating Your Life Insurance Coverage Amount
Life insurance can be expensive, but there are ways to lower your premium. Here are a few tips to help you calculate your life insurance coverage amount.
Be realistic. You want to ensure your loved ones are covered financially, so it is best to be realistic about your finances and how they might change over the years.
Consult with your loved ones. Discuss your life insurance purchase with your loved ones to help them understand what expenses will be covered and to get their thoughts on the coverage amount you have in mind.
Purchase multiple policies. Multiple policies allow you to cover certain expenses from certain periods. For example, you can have two separate policies, one covering your spouse and another covering your children and their college expenses.
Remember, the goal is to choose a coverage amount that ensures your loved ones remain financially stable after your passing. If you are still unsure about the figure you have in mind, it doesn’t hurt to increase it.
Shop around. Compare rates from different life insurance companies to confirm who has the best deal.
Calculate your life insurance needs. Buying more coverage than you need will result in you paying more for life insurance. However, if you calculate your life insurance needs, you’ll save money because you won’t pay for unnecessary coverage.
Purchase term life insurance. Term life is the more affordable life insurance option, and it offers higher coverage limits.
Make lifestyle changes to improve your health. You don’t have to be perfectly healthy, but making a few lifestyle changes can positively impact your premium. For example, exercising and losing weight will get you grouped in a rate class.
Look into group insurance. Enrolling in an employer-sponsored life insurance program gets you life insurance for little to no cost as long as you are employed.
Our guide to the cheapest life insurance companies can help you find affordable rates with highly-rated life insurers near you. Read now and use our free comparison tool below to get life insurance quotes from local companies.
Frequently Asked Questions
Why do I need life insurance?
The answer is different for each person. Some wish to purchase just enough life insurance to cover their funeral expenses after they pass away.
Others may wish to ensure a mortgage is paid off after their death, or a child is able to afford college, while some people want to leave behind an inheritance. It’s important to evaluate your particular needs before purchasing coverage.
Which formula is best for calculating how much life insurance you need?
To ensure you get a more precise figure when calculating how much life insurance you need, use the below formula.
Financial obligations – existing assets = life insurance coverage amount
Financial obligations may include the following:
Annual salary multiplied by years of income to be replaced
College expenses
Funeral expenses
Remaining mortgage balance
Any additional debts
The cost of services to be replaced that are provided by a stay-at-home parent, such as child care
Existing assets may include the following:
Savings
Life insurance policies
College savings
Knowing how much coverage you need will help you compare quotes from different life insurance companies.
What are the three types of life insurance?
The three main types of life insurance are term life, whole life, and universal life insurance.
Set coverage period, typically 10, 20, or 30 years
Fixed premium
Fixed coverage amount
Renewable
No cash value
Age limit
Whole life insurance
No set coverage period
Fixed premium
Fixed coverage amount
Accumulates cash value
No age limit
Pays out annual dividends
No set coverage period
Adjustable premium
Adjustable coverage amount
Accumulates cash value
No age limit
Investment account that accrues interest
When choosing term life, policyholders may have the option to convert to whole or universal life depending on the insurance company.
Should I purchase term or whole life insurance?
When choosing which type of life insurance to purchase, consider why you are purchasing a policy. If you want affordable coverage for a limited period, term life might be more suitable. But if you want more expensive life insurance that provides coverage for life, whole life would be best.
How much life insurance do I need at age 60?
If a loved one depends on you financially, your life insurance should cover the cost of replacing your income and financial obligations, which can include existing debts, mortgages, college tuition, and funeral expenses.
Should life insurance be used as an investment?
Whole and universal life insurance are the only two types of life insurance that carry a cash value, so if you want to use life insurance as an investment, you should avoid purchasing term life insurance.
However, depending on your goals, another type of investment account, such as an IRA or 401(k), would be a better option.
How can I save money on life insurance?
Here’s how you can save money on life insurance
Shop around. Compare rates from different life insurance companies to confirm who has the best deal.
Calculate life insurance needs. Buying more coverage than you need will result in you paying more for life insurance. But if you calculate your life insurance needs, you’ll save money because you won’t pay for unnecessary coverage.
Purchase term life insurance. Term life is the more affordable life insurance option and it offers higher coverage limits.
Make lifestyle changes to improve health. You don’t have to be perfectly healthy, but making a few lifestyle changes can positively impact your premium. For example, exercising and losing weight will get you grouped in a rate class.
Look into group insurance. Enrolling in an employer-sponsored life insurance program gets you life insurance for little to no cost as long as you are employed.
Ultimately, if you are trying to save money on life insurance, purchasing term life insurance is ideal because it is the cheapest life insurance option.
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Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.
Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Written by
Rachael Brennan
Licensed Insurance Agent
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Reviewed by
Benji Carr
Former Licensed Life Insurance Agent
