How much life insurance do I really need?

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.

Read more: How does life insurance work?

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. 

Read more: Can you have multiple life insurance policies?

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.

Read More: Is life insurance an asset?

Your life insurance quotes are always free.

 Secured with SHA-256 Encryption

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 Insurance	Whole Life Insurance	Universal Life Insurance
Set coverage period, typically 10, 20, or 30 years	No set coverage period	No set coverage period
Fixed premium and coverage amount	Fixed premium and coverage amount	Adjustable premiums and coverage amounts
Renewable	Accumulates cash value	Accumulates cash value
No cash value	Pays out annual dividends	Investment account that accrues interest
Age limits	No age limit	No age limit

Read more: Life Insurance Dividends (Terms Explained)

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. (For more information, read our “Life Insurance for Firefighters“).
• 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.

Your life insurance quotes are always free.

 Secured with SHA-256 Encryption

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.

Case Studies: Determining the Right Amount of Life Insurance Coverage

Case Study 1: John’s Comprehensive Calculation

John, a 35-year-old married individual with two children, wanted to ensure his family’s financial stability in case of his untimely death. He opted for a comprehensive calculation to determine the right amount of life insurance coverage.

By carefully analyzing his finances, including outstanding debts, mortgage, children’s education expenses, and estimated future living costs, John subtracted his existing assets such as savings, investments, and other insurance policies.

The resulting figure helped him determine the appropriate life insurance coverage amount for his family’s needs.

Case Study 2: Sarah’s Quick Calculation

Sarah, a 28-year-old single professional, wanted a quicker way to estimate her life insurance needs without delving too deep into her finances. She used a simplified approach to calculate her coverage amount.

Sarah considered her financial obligations, including student loans, credit card debt, and funeral expenses. She then estimated her existing assets, such as savings and retirement accounts.

By subtracting her existing assets from her financial obligations, she obtained a rough estimate of the life insurance coverage amount that would adequately protect her loved ones.

Case Study 3: Robert’s DIME Formula

Robert, a 45-year-old self-employed individual, wanted a clearer picture of his financial obligations before determining his life insurance coverage amount. He used the DIME formula as a guide.

Robert added up his debts, including mortgage, outstanding loans, and other financial obligations. He then calculated his income replacement needs, factoring in the number of years his family would require financial support in his absence.

Next, he considered his children’s education expenses. Lastly, he accounted for the cost of his funeral. By summing up these four categories, Robert obtained a comprehensive figure for his life insurance coverage.

Your life insurance quotes are always free.

 Secured with SHA-256 Encryption