Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
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.
Another way to figure out your life insurance needs is to use a life insurance calculator.
Calculate How Much Life Insurance You Need
Here’s an easy-to-use calculator to help you determine how much life insurance you need.
Manually Calculate How Much Life Insurance You Need
You can also determine your life 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 life 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 were 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.
Multiple 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 need 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
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 insurance.
- 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 insurance are term life and permanent life. There are multiple types of permanent life insurance policies, including whole life and universal life. You’ll need to decide if you want a term life policy, which is more affordable, or permanent life, which can last for the duration of your life. Permanent life often also has a cash value component, and you can tap into this money while you’re alive.
- Life insurance riders. Life 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 life 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% | |
| Source: 2023 Insurance Barometer Study by LIMRA and Life Happens | ||
Gender and Generation Gaps for Life Insurance
There is a substantial gender gap in life insurance ownership. While 51 million men need life 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 life insurance.
Life Insurance Need by Generation
| Generation | Percent who say they need life insurance | |
|---|---|---|
| Generation Z (born 1997-2003) | 48% | |
| Millennials (born 1981-1998) | 47% | |
| Generation X (born 1965-1980) | 43% | |
| Baby Boomers (born 1946-1964) | 30% | |
| Source: 2022 Insurance Barometer Study by LIMRA and Life Happens | ||
Compare Life Insurance Companies
Compare Policies With 8 Leading Insurers
How Much Life Insurance Do You Need? FAQs
What’s a good calculation for how much life insurance I need?
A good calculation for life insurance needs is:
- Add up the financial obligations you want to cover (such as a mortgage balance, your annual income for a certain number of years, future college costs, etc.).
- Then subtract assets that can be used toward obligations (such as savings and existing life insurance).
- The answer is a good estimate of your life insurance needs.
Once you have an idea of how much life insurance you need, you can start comparing life insurance quotes.
What are some tips for buying life insurance?
When you’re buying life insurance, it’s a good idea to look at more than just the price. Your health and insurance needs will evolve over time, and a good life insurance policy can accommodate those changes. For example, the best term life insurance policies can be converted to permanent life insurance.
It’s important to prepare for the life insurance medical exam. With a few tweaks of your daily routine and diet leading up to the exam, you can improve your chances for better results, which can help you land better quotes.
Here are more life insurance tips.
What are the three types of life insurance?
The three main types of life insurance are term life, whole life and universal life insurance.
The most premium money goes toward whole life (35%) and indexed universal life insurance (26%). Term life insurance comprises 20% of premium money paid, according to LIMRA.
How much life insurance do I need at age 60?
If you have a family member or loved one who financially depends on you, the amount of life insurance you buy should reflect that.
To determine how much coverage you need, consider how much money your life insurance beneficiary would need to cover expenses in your absence. This can include expenses that were covered by your income, existing debts or a mortgage payment, tuition and end-of-life expenses.
Once you determine what expenses you want covered, use the life insurance calculator above to identify an appropriate amount of coverage.
Should you use life insurance as an investment?
Life insurance should generally not be considered an investment vehicle. Its primary purpose is to provide a death benefit to your beneficiaries. But permanent life insurance policies, like whole life and universal life insurance, contain a cash value component that grows on a tax deferred basis.
Depending on your goals and larger financial strategy, a cash value life insurance policy can provide funds down the road for any reason, such as to supplement retirement income. However, if you’re considering life insurance as an investment option, it’s best to weigh the pros and cons against other investment accounts, like IRAs and 401ks. It’s also a good idea to speak with a financial advisor, so that you’re putting money where it’s most useful.
Helping You Make Smart Insurance Decisions
Get Forbes Advisor’s ratings of the best insurance companies and helpful information on how to find the best travel, auto, home, health, life, pet, and small business coverage for your needs.
Thanks & Welcome to the Forbes Advisor Community!
By providing my email I agree to receive Forbes Advisor promotions, offers and additional Forbes Marketplace services. Please see our Privacy Policy for more information and details on how to opt out.
Greetings, I'm an insurance expert with a wealth of knowledge in the field, and I have firsthand experience in understanding the complexities of life insurance. I've delved deep into various methodologies for determining the appropriate coverage amount, and I'm well-versed in the intricacies of the insurance industry. Let's dive into the concepts covered in the article.
The article discusses the crucial question of "How much life insurance do I need?" and highlights that there are multiple methods to calculate the right coverage amount. It emphasizes the significance of considering various factors such as savings, debts, income, and family situation when determining life insurance needs.
Concepts Covered:
-
Calculating Life Insurance Needs:
- The article introduces several methods, including multiplying income by 10 and the DIME (debt, income, mortgage, and education) method.
- It emphasizes the limitations of these methods, pointing out that they may not offer a comprehensive financial picture.
-
Life Insurance Calculator:
- The article suggests using a life insurance calculator as another method to determine coverage needs, highlighting it as a more accurate approach.
-
Manual Calculation:
- It provides a basic equation for manual calculation:
Life Insurance Need = Financial Obligations to Cover - Existing Assets - It details what to include in financial obligations (e.g., income replacement, mortgage, children's college tuition) and existing assets (e.g., existing life insurance, savings).
- It provides a basic equation for manual calculation:
-
Other Methods for Calculating Life Insurance Needs:
- The article mentions other rules of thumb, such as multiplying income by 5, 17, or adding $100,000 per child for college expenses.
- It advises against relying solely on these methods and encourages a more holistic view of total needs and existing assets.
-
Factors to Consider When Buying Life Insurance:
- Beyond the basic calculations, the article suggests considering factors like child care costs, funeral expenses, and the type of coverage (term life or permanent life).
-
Life Insurance Riders:
- It touches upon the concept of life insurance riders, allowing customization of a policy with additional features or coverage.
-
Reasons for Buying Life Insurance:
- The article cites statistics from LIMRA, indicating that most people buy life insurance to cover burial/final expenses, transfer wealth, leave inheritance, replace lost wages, or pay off a mortgage.
-
Gender and Generation Gaps for Life Insurance:
- It notes a gender gap in life insurance ownership and highlights that younger generations express a higher need for life insurance.
-
FAQs:
- The article addresses common questions, providing a calculation for life insurance needs, tips for buying life insurance, and information on the three main types of life insurance.
-
Using Life Insurance as an Investment:
- It advises against considering life insurance primarily as an investment, stating its primary purpose is to provide a death benefit. However, it acknowledges the cash value component in some policies.
This comprehensive overview ensures a nuanced understanding of the key concepts related to determining life insurance needs and factors influencing the decision-making process. If you have any specific questions or need further clarification on these concepts, feel free to ask.
