“How much life insurance do I need?” is one of the most common questions people ask, and one of the most commonly overcomplicated. You don’t need a financial planner to get a solid estimate. You need a pencil and about ten minutes.
The quick rule of thumb
A common starting point is 10 to 12 times your annual income. It’s rough, but it’s a lot better than guessing, and it’s often far more than the coverage people get through work.
A better estimate: the DIME method
Add up four things your family would need to cover without you:
- D – Debt: car loans, credit cards, and personal loans, plus final expenses.
- I – Income: your annual income multiplied by the number of years your family would need it.
- M – Mortgage: what’s left on your home loan, or several years of rent.
- E – Education: what you’d like to set aside for your kids’ schooling.
Then subtract what you already have: existing life insurance and savings your family could use.
An example
| Debt and final expenses | $15,000 |
| Income: $60,000 × 10 years | $600,000 |
| Mortgage balance | $200,000 |
| Education: 2 kids × $50,000 | $100,000 |
| Total need | $915,000 |
| Minus coverage through work | –$100,000 |
| Minus savings | –$50,000 |
| Coverage to consider | About $765,000 |
In this example, a $750,000 or $800,000 term policy would be a reasonable target.
Don’t forget the stay-at-home parent
A parent who doesn’t earn a paycheck still provides childcare, transportation, cooking, and a hundred other things that would cost real money to replace. Coverage for a stay-at-home parent is often overlooked and often inexpensive.
How long should coverage last?
Match the length of a term policy to how long people will depend on you. If your youngest is 5 and your mortgage has 25 years left, a 20- or 25-year term might fit. Not sure about term versus permanent coverage? Read term vs. whole life, explained.
The bottom line
Start with 10 to 12 times your income, then refine it with DIME. Coverage through work is a good start, but it’s rarely enough on its own and may not follow you if you change jobs.
Want a second set of eyes on your coverage?
A licensed local agent can compare rates from multiple carriers, explain your options in plain English, and tell you if something important is missing. It’s free, and there’s no obligation.