How Much Term Life Insurance Do I Need?

Once we have children or anyone who depends on us financially, our financial obligations grow. That means planning for the unexpected. No matter what life looks like a decade, a year or even a day from now, you want to make sure your family has what they need.

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?

Once someone decides whether they need life insurance, the next question we usually hear is: “How much life insurance do I need?”

There’s no set number. The right amount of coverage varies from one family to another. We’ll discuss two prominent methods to figure out your level of need: the income replacement approach and 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? Some debts don’t go away after your death, and you may have hopes and plans for the future that you’d like to help protect, even after you are no longer here.

A Rule of Thumb: The Income Replacement Approach

One simple way of answering "how much life insurance do I need?" is to calculate your coverage based on your annual income. While there isn’t an easy, one-size-fits-all answer, a common recommendation is to start by considering purchasing enough insurance to cover 10 times your annual salary. The idea is to replace your financial contribution to your household long enough for your spouse to find their footing or finish sending kids through school.

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 enable your spouse to pay off the mortgage?

Discussing life insurance can be a surprisingly personal conversation. Every family has their own reasons for why life insurance feels important, and what number feels right to provide a helpful benefit and help offer a sense of security. Reviewing your specific needs can help you come up with a number that reflects your particular circumstances.

There are a few options you can explore to calculate your needs, depending on how detailed you like to be.

Simple Rule of Thumb: DIME

The analyze-your-needs approach is more precise than simply multiplying your income by 10. But if adding up every little expense sounds like way too much and you crave an easier approach that’s nonetheless a little more customized to your situation, consider figuring out your “DIME.”

That means totaling up your:

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

• Income: This entails figuring out how many years you would like to offer loved ones financial support, then multiplying your annual take-home income by that number of years.

• Mortgage: Mortgage deserves its own section, as it’s often the largest debt many people have. How much is your current mortgage, and how long will it take to pay it off?

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

With the DIME method, you’ll still need to track down some numbers and facts, but the structured sections can help organize your calculations and you can do whatever estimating feels right to help you keep things simple while also preparing a thoughtful plan for what insurance amount you may need.

Deep Dive Into Costs, Income and Assets

This take on the analyze-your-needs approach is a little more involved, but it can help you put together a more precise figure. To get started, follow these three steps:

1. Total your fixed costs

2. Figure out your “income replacement” needs

3. 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 expenses can really sneak up on you, so it’s good to be thorough. For example, a traditional funeral can cost over $8,000, not including cemetery and burial expenses.

2. Think about your “income replacement” needs.

This includes:

• 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 idea of for how much money your family might need as “income replacement” on an ongoing basis. (Your right-fit number is up to you, but you might also choose to build in a little buffer in case your partner were to experience a period of unemployment, had to take a job with less pay down the line, or needed to pay for higher expenses.)

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.

Finally, subtract your assets. There are various ways to help protect your family financially. Life insurance is one tool to consider, and assets like savings can be another piece in your plan. Total up what you have already:

• Savings accounts

• Investments

• Retirement funds

• Other assets

Now subtract those assets from the total you’ve been working on. This can help you put together a general estimate of how much life insurance 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. Stay-at-home parents provide significant value in the work they do to care for dependents, manage household tasks and support an income-earning partner’s career.

If a stay-at-home partner passes away, the surviving partner may have to rearrange their schedule and budget to figure out childcare, housekeeping, pet care, home admin and more. They may need to adjust their working hours to take on a more demanding schedule of errands and kids’ activities.

In many cases, life insurance providers have a metric in place to calculate a stay-at-home partner’s insurance amount. Typically, the process works by determining insurance for the income-earning partner first, and then using a simple calculation to set an insurance policy face value, or coverage amount, for the stay-at-home partner (often anywhere from 50–100%).

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. Stay-at-home parents provide significant value in the work they do to care for dependents, manage household tasks and support an income-earning partner’s career.

If a stay-at-home partner passes away, the surviving partner may have to rearrange their schedule and budget to figure out childcare, housekeeping, pet care, home admin and more. They may need to adjust their working hours to take on a more demanding schedule of errands and kids’ activities.

In many cases, life insurance providers have a metric in place to calculate a stay-at-home partner’s insurance amount. Typically, the process works by determining insurance for the income-earning partner first, and then using a simple calculation to set an insurance policy face value, or coverage amount, for the stay-at-home partner (often anywhere from 50–100%).

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. Some of these policies may have relatively low coverage limits, such as a total cap of $50,000, or an amount based on salary (e.g., one or two years’ salary equivalent). As we’ve seen from the examples and calculations above, that’s simply not enough for a lot of people.

Additionally, you generally cannot 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 many cases it may make sense for both of you to be covered. That way, if either of you passes, the other one will have a financial benefit to help them out.

Each of you might have distinct financial burdens. For example, one of you may have student loan debt that they’ve co-signed whereas 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. The idea is to figure out what makes the best sense for you, so you feel confident that your policy covers what you need it to.

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