How Much Term Life Insurance Do I Need?

It’s not much fun to ponder our mortality, or our spouse’s. But once we have children or anyone who depends on us financially, our financial obligations grow. That means planning for the unexpected. 

Life insurance is designed so that if you or your spouse died unexpectedly, your family would have help with their financial needs. For example, would your family have enough to cover the rent or mortgage without you? What about funeral expenses? 

After figuring out whether you need life insurance, the next question we usually hear is: “How much life insurance do I need?”

There are a few methods you may use to calculate your insurance needs:

• The income replacement approach

• The analyze-your-needs approach

What Types of People Need Life Insurance?

There are many different reasons to get life insurance, but the most common is to help out loved ones who rely on you for income. Do you have financial dependents like children? What about aging parents or siblings? Has anyone co-signed on your debts? After all, some kind of debts don't go away even after you are no longer here.

A Rule of Thumb: The Income Replacement Approach

The simplest way of answering "how much life insurance do I need?" is to calculate your coverage based on your annual income. While there’s not an easy one-size fits all answer,  Nerdwallet recommends that those who are married with kids should consider purchasing enough insurance to cover 10 times their annual salary. 

The Analyze-Your-Needs Approach

Want a slightly more nuanced approach to determining how much coverage to get? Start by looking at various personal factors in your life. Taking your entire financial picture into account can be important. For example, do you want to help your kids fund college, or your spouse pay off the mortgage? 

Another rule of thumb: DIME

The "analyze your needs" approach is more precise than simply multiplying your income by 10. But if you're not game to add up every little expense and still crave an easy rule of thumb that's nonetheless a little more customized to your situation, consider thinking about "DIME."

That means totaling up your:

• Debt and final expenses: This includes debt like car loans and co-signed credit cards but excludes your mortgage.

• Income: This entails figuring out how many years your loved ones would need financial support and multiplying your annual take-home income by that amount.

• Mortgage: At the time you're applying for life insurance, how much is left on your mortgage?

• Education: How much do you predict it'd cost to send your kids to college, and what percentage of that tuition would you like to cover through life insurance?

The most nuanced way to figure out how much term life insurance you need

This take on the "analyze your needs" approach is a little more involved but more precise. To get started, follow these three steps: 

• Total your fixed costs 

• Figure out your "income replacement" needs

• Subtract your assets

1. Total your fixed costs

Consider the following numbers as you determine your life insurance needs:

• Your current debts (including a mortgage and other committed expenses)

• Long-term goals, like paying for retirement or for your child’s education

• Final expenses such as funeral costs

Start by totaling these potential costs that you’d want to cover if you weren’t around.

Some of these expenses can really sneak up on you, so it’s good to be thorough. For example, the median cost of a funeral with a viewing and burial runs more than $7,000—and that doesn’t include flowers, the expense of printing an obituary or food for the post-service reception. 

2. Figure out your ‘income replacement’ needs

Next, think about:

• How much income your family needs each year to get by, adjusted for any additional expenses such as extra childcare, health insurance or housekeeping if you weren’t around

• How much income your spouse or partner makes 

Do the subtraction: How big is the gap between those two numbers? This should lead you to a clearer number for how much money your family might need as “income replacement” on an ongoing basis. (Up to you, but you might choose to build in a little buffer just in case your partner were to experience a period of unemployment, or had to take a job with less pay down the line.) 

After that, decide how many years you want this “income replacement” money to last. Do you want to provide this for 20 years? Or do you think that your spouse could make do with a five-year runway? 

Whatever you decide, multiply your “income replacement” amount by the number of years you want your family to have that extra support. Add that to your total fixed costs.

3. Subtract your assets

Total up what you do have already in the bank:

• Your current assets and retirement funds

Now subtract those assets from the total you’ve been working on. This is a general estimate of how much life insurance, the coverage amount, you might want to apply for.

How Much Coverage Should Stay-at-Home Parents Get?

Just because a stay-at-home parent isn’t bringing in an official salary doesn’t mean they should skimp on life insurance coverage.

We interviewed Zaneilia Harris, CFP and President of Harris & Harris Wealth Management Group. She says, “A stay-at-home parent is a major contributor to the household.That parent is worth at least $60,000 to $100,000 to the household.”

That number may sound like a lot when you’re up to your elbows in dirty diapers, but consider that if a stay-at-home parent were to die, the remaining spouse would need to pay for childcare, housekeeping and pet care, not to mention all the other facets of life the stay-at-home parent may be in charge of, like meal planning and preparation and errand running. 

To figure out how much life insurance to get for a stay-at-home parent, tally up what it would cost to farm out all the services the stay-at-home parent provides. According to one survey from 2024, the financial value of a stay-at-home mom is $133,440 per year (the cost of paying professionals to do equivalent work), an increase of 5% from the prior year’s “Mother’s Day Index.” 

From there, you can use the income replacement approach and multiply that amount by 10 to determine the approximate coverage amount.

Is Life Insurance Through My Job Enough?

While it's great that many employers offer group life insurance as an employee benefit, this is often not sufficient. First, some of these policies may have relatively low coverage limits, such as $50,000. As we've seen from the examples and calculations above, that's simply not enough for a lot of people.

Additionally, you may not be able to take the policy with you when you leave your job. Or, if you can convert your group policy into an individual policy, there's a good chance you'll have to pay significantly more for coverage if you do so.

Do My Spouse and I Both Need Policies?

This will depend on your individual situation, but in most cases it will make sense for both of you to be covered. That way, if either of you passes, the other one will have financial means to get by.

Same goes if one of you is a stay-at-home parent. Just remember the cost of additional childcare and household work if they were no longer here. Plus, you might want to leave each other a financial buffer in case the surviving spouse needs some bereavement time away from work.

Factor in, as well, that each of you might have distinct financial burdens. For example, one of you may have co-signed student loan debt even if the other doesn't. Additionally, one of you might plan to financially support aging parents now or in the future.

While some spouses carry the same amount of coverage, note that you don't have to insure yourselves for the same amount.

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