Doing a quick internet search will bring up multiple “rules” you can use to determine how much life insurance coverage you need.
Scroll through the first page of results, and you’re likely to see different formulas calling for as little as 5 times your yearly income to as much as 17 times your yearly income as being the right amount of life insurance coverage to have.
5-17x annual income is a wide range, so we don’t blame you if you’re confused about getting a straight answer to the question.
Fortunately, there are simple and effective ways to get a good idea of how much coverage to buy, which we will explain in detail.
Read on for a closer look as to how to calculate the right amount for your family and your situation, and be sure to check the FAQ section at the end of this article for answers to some of the most popular questions when it comes to buying life insurance.
3 Quick Formulas To Calculate How Much Life Insurance Coverage You Need
There are a couple of easy calculations that are popular for determining how much life insurance coverage to buy. These formulas don’t require a detailed look into your finances. They can provide a quick calculation for the total amount of life insurance coverage you may want to consider when taking out a policy.
#1. The Income Multiplication Formula
One of the oldest and easiest formulas to figuring out how much life insurance you should buy is to multiply your pre-taxed annual income by 10-15. This method is often referred to by many financial experts as the rule of thumb method.
This calculation focuses on replacing pre-taxed annual income by a multiplier of 10 to 15x. The multiplier represents the number of years worth of income your beneficiary would need to maintain their current lifestyle if you were to pass away.
The multiplication method is one of the most used forms of determining life insurance coverage. As mentioned at the beginning of the article, it is the reason why you see so many different multiplier amounts because there is really no accurate answer that will be the same for each person when it comes to this method. Everybody will have different life insurance needs based on their own unique situation.
So, let’s say a husband named Joe and his wife named Maria are looking to purchase a life insurance policy. Joe has an annual income of $65,000, and Maria makes $85,000 a year.
Using this simple calculation, Joe and Maria feel that they would each need 10 years’ worth of each other’s income should one of them pass away. In this case, Maria’s death benefit would be $850,000 ($85,000 x 10) with Joe as the beneficiary, and Joes’ death benefit would be $650,000 ($65,000 x 10) with Maria as the beneficiary of Joe’s policy.
However, this formula has some serious drawbacks. It doesn’t consider Joe’s or Maria’s other expenses, debts, assets, or future financials.
It might be a fast way to estimate coverage, and it can work, but it does leave a lot out of the overall picture. The 10-15 times income formula can give you a good starting point to how much life insurance coverage you should buy, but it won’t show you your exact coverage needs.
#2. The Income Plus Tuition Expenses Formula
This simple rule takes the multiplier of income formula and adds $100,000 in tuition expenses for each child. If Joe and Maria from the previous example have two children, that will bring each of their two totals up by an extra $200,000. This formula is a little more involved because it focuses on education expenses for the children, but it still leaves out many other details.
#3. The DIME Formula
There are more than just one or two ways to calculate the amount of coverage you need. You can take some of those same numbers and apply what’s called the DIME formula.
DIME stands for:
With the DIME formula, you’ll focus specifically on four areas that would require the need for coverage. To get an example of how this formula works, let’s go back to Maria. She could use the DIME Formula in this way:
- Debt – $50,000 ($50,000 to payoff loan debt)
- Income – $850,000 ($85,000 a year in salary for 10 years)
- Mortgage – $225,000 (total balance left on the mortgage)
- Education – $200,000 (total tuition needed to pay for two children)
Based on the DIME life insurance formula, Maria’s ideal amount of life insurance coverage comes out to a total of $1,325,000. Compared to the two previous formulas, the DIME formula has added two financial need factors: debt payoff and mortgage payoff.
The DIME life insurance formula is a good calculation method focusing on the most important financial factors.
You can use all three of these easy formulas to get a rough idea, but if you want a more exact number, you’re going to need to look at all the details. You’ll need to look at your personal financial situation from top to bottom to know just how much coverage you need.
If this sounds overwhelming, don’t worry. It’s not as complex as it might sound. You can follow the steps we’ve outlined below to figure out how much coverage to buy.
Step 1: Understand The Financial Factors That Affect How Much Life Insurance You Need
There’s a lot to consider when you’re looking into buying a life insurance policy. You might not be able to predict how much coverage you need perfectly, but you can come close with some careful planning. There is no one set answer for everyone, but there are a few things you should always consider when you’re trying to calculate the right amount.
Your dependants – Any dependants you have can increase the amount of coverage you’ll need. This could mean your significant other, your children, an older parent that you’re the caregiver for, or anyone else who lives in your home and depends on your income.
It should also include any dependents you might have in the future. For example, it’s a good idea to plan for potential future children, especially if you and your spouse are open to expanding your family sometime later in the future.
Future educational expenses – On average, a four-year college degree costs over $100,000. That’s a serious expense and one many parents include when they’re calculating how much life insurance they need to buy. Including the cost of your children’s future tuition in your policy is a great way to ensure their education is covered if you pass away unexpectedly.
Any end-of-life expenses – It’s always a good idea to consider funeral and other end-of-life costs when you’re buying a life insurance policy. Funerals can cost more than $10,000. Without that money factored into the life insurance coverage, loved ones might have to borrow from savings or take out expensive loans to cover the cost.
Medical expenses – Health insurance can cover a significant portion of medical expenses. Still, not even the best policy can cover all the costs associated with medical or even injury-related death. Any unpaid medical expenses could be passed onto a surviving spouse.
Your income – Life insurance is meant to replace your income if you die unexpectedly. So, while you can, and should, add in expenses like your children’s tuition, you shouldn’t wildly overshoot your current income.
Plus, most insurance companies won’t approve your application if you’re asking for coverage that seems well outside your income. For example, you’d have a hard time securing a five-million-dollar policy if you made $45,000 a year.
Your budget – It’s important to have a premium payment that you can afford. If you set your coverage limit too high, your premiums might be a strain on your budget. Not paying your premiums will cause your policy to lapse and your coverage to end.
You can check out quotes online to see what different amounts of coverage will cost you each month to start getting an idea of how much coverage you can afford.
Your debts – Any debt you owe should be factored into your life insurance policy. By including your outstanding debt in your policy, you can ensure your debt isn’t left to your loved ones if you pass away suddenly. This might include your mortgage, car loans, personal loans, or credit card balances, etc.
Your age – Most people need less coverage as they age. As you approach retirement, you’ll likely have paid off major debts, like mortgages or student loans. Children are more likely to be out of the home and on their own financially. That means you’ll need less coverage and can buy a smaller policy.
Step 2: Gather The Numbers of Your Finances
Once you have looked at all the financial factors that would play a part in determining how much life insurance coverage you need, it’s time to start crunching actual numbers.
You’ll need to know all the factors of your personal financial situation to figure out how much coverage you need. Having a clear picture of your finances is key to figuring out how much life insurance you actually need.
Your Income and Financial Assets
The first thing you need to know is your income. If you work a job with a set salary, you likely already know this number. If you work multiple jobs, are paid hourly, self-employed, or run a small business, you might need to make some calculations.
Your tax returns for the past few years are a good place to start. You can also check your bank records or any financial software you use to get an average of your yearly income.
You’ll also need to know the value of your financial resources. Financial resources are things you own that have a significant monetary value. This might include:
- Real estate
- Savings accounts
- Retirement accounts
Your cash value assets are important because your surviving loved ones can use these expenses to pay debts. Things of monetary value can help reduce the total amount of life insurance needed.
Calculate Your Monthly Living Expenses
It’s always a good idea to figure out your household expenses when determining how much life insurance to buy. Your expenses are unique to your family and your financial situation. Common expenses to consider include:
The monthly income needed to support your household. This is the amount of money needed to cover all the general monthly expenses in an entire year. This might include costs like your mortgage or rent payments, bills such as cellphone, utilities, groceries, other insurance policies, and even spending money.
You can get an estimate of this number by comparing your monthly income to your monthly spending. Your bank account or credit card statements should easily show you these numbers. You can then multiply this amount by 12.
It is also a good idea to factor in any potential costs that could arise later in life, especially if you are a homeowner. Consider the possibility of costly home repairs that can become a financial burden to your serving spouse if you were to pass away. Large ticket expenses that could come up, such as a new roof, furnace, air conditioner, or septic tank, can be very costly.
If you have children, you will want to look at current and any future costs that it will take to raise the children. According to the USDA, it costs an average of $12,980 each year to raise a child. That’s about $233,610 from birth to age 17. You can multiply this average cost by the number of children you have to get this cost.
This is also where you can figure out the cost of things you don’t pay for now but might in the future. Take, for example, the cost of college tuition, braces, healthcare, sports, etc.
Average Costs for Common Expenses at Glance
The below table represents some of the most common expenses that the average American could very likely end up paying in their lifetime. While not every expense will apply to everyone, just experiencing a few can quickly begin to add up and become very costly.
We have done some research to determine the average cost for each expense listed within the table. Keep in mind that these are only averages, and the actual cost could be less or even greater depending on where you live or the company you choose to work with. However, the main purpose is to provide insight into potential expenses that may need to factor into your life insurance amount.
|Common Expenses||Average Costs|
|Average student loan debt:||$29,900|
|Average cost of a wedding:||$19,000 - Ceremony and reception|
|Average home cost:||$272,446 - Middle priced home|
|Average cost of raising a child:||$233,610 - Newborn to age 17|
|Average cost of daycare:||$11,896 per year|
|Average cost of braces:||$3,000 to $6,000|
|Average cost of college:||$102,460 In-state living on campus|
|Average cost of owning a dog:||$1,400 to $4,300 per year|
|Average cost of owning a cat:||$809 per year|
|Average cost of groceries per month:||$150 - $300|
|Average cost of cellphone bill per month:||$113|
|Average cost of cable and internet per month:||$29.99 to $179.99|
|Average cost of electricity per month:||$110.76|
|Average cost of garbage services:||$140 - $360 per year|
|Average new car cost:||$25,000 - Midsize car|
|Average cost of gas:||$2.860/gallon|
|Average credit card debt:||$6,194|
|Average cost of roof replacement:||$8,228|
|Average cost of furnace replacement:||$5,500|
|Average cost of air conditioner replacement:||$3,350 - $5,912|
|Average cost of water heater:||$300 to $600|
|Average cost of washer and dryer:||$450 to $3,800|
|Average cost of nursing home care:||$8,821 Per month private room|
|Average cost for a funeral:||$7,640 - $9,135|
Calculating Your Debt
Not all debts will fall to your family if you die, but that doesn’t mean you shouldn’t plan for them. Even the smallest debts can still affect your family and cause them financial stress. This is especially the case if any debts are cosigned with your spouse or another family member.
For example, if you and your spouse are co-signers on your mortgage or auto loan, they’ll need to keep making payments after you die or risk it possibly going into collections.
Even if your debt wasn’t cosigned, it could still end up causing your family problems down the road. Banks and other financial institutions may be able to take any owed payments out of your estate.
That means any money you’re planning to leave behind could end up going to pay off debt rather than your spouse or children. That’s why it’s a good idea to include these amounts when you’re calculating how much insurance you need. Common debts include:
- Students loans
- Car loans
- Credit card debt
- Medical debt
Step 3: Do the Math To Calculate How Much Coverage You Need
Once you have the numbers you need, you can begin calculating a life insurance amount that makes sense for you and your family. You’ll need to compare your income and assets against your debt and expenses. You can follow this formula:
- Determine the annual income amount needed for your family to maintain their lifestyle and pay for daily living expenses.
- Multiply your annual income amount by the number of years your family would need financial support after your passing.
- Add the total amount of your debts that you would like for your family to pay off immediately.
- Add an amount reserved for child education expenses.
- Add an amount that would be needed to help pay for any final expenses such as medical bills or funeral costs.
- Subtract financial assets and any current life insurance plans.
As an example of how this works, let’s go back to Maria. Maria has an annual income of $85,000. She determines that her husband, Joe, would need her income for at least ten years if she were to pass. She chooses ten years because her youngest child would be financially independent, and her husband Joe would not require Maria’s income after that point in time.
Maria’s annual income of $85,000 multiplied by 10 years provides a starting amount of $850,000 of needed life insurance coverage.
Maria has two children and wants to make sure she can support them both through college. Because she has two young children, she decides to add $200,000 for college expenses. She also wants to include $50,000 to cover unexpected expenses and another $10,000 to cover end-of-life expenses such as funeral costs. Maria can total her expenses in this way:
- $850,000 in income to support her household ($85,000 annual income multiplied by 10 years)
- $200,000 in education expenses for each of her children ($100,000 per child)
- $100,000 to pay off the remaining mortgage balance
- $50,000 in unexpected expenses (potential home and auto repairs)
- $10,000 in final expenses (funeral and burial costs)
- That’s a total of $1,210,000
Although the math shows that Maria’s needed life insurance amount totals $1,210,000, it does not factor in current financial accounts or any active life insurance policies, which can be subtracted from the $1,210,000 of coverage.
Maria can reduce the total amount of life insurance coverage needed by adding her current financial assets:
- $65,900 in personal checking and savings
- $150,000 in a retirement account
- $25,000 in investments
- $10,000 in bonds
- $250,000 in personal life insurance coverage
- Total money in financial assets: $500,900
Since Maria’s husband, Joe would have access to the $500,900 of financial assets if Maria passed away, she can reduce the $1,310,000 of needed life insurance to a $709,100 life insurance policy. She could apply for a one-million-dollar policy to meet her needs and keep her family covered.
Other Considerations When You're Buying Life Insurance
It’s easy to miss some important things about your financial situation even when looking at more detailed numbers. Some other things you should consider include:
- Your spouse’s income
- How much you anticipate your income might increase over the years
- How much any assets you own might increase in value
- Your dependents who aren’t children
- Major purchases you plan to make in the future
For example, let’s say Maria’s husband Joe makes $65,000. Maria and her husband sit down and talk about their finances. Her husband’s income can be used for half of the household expenses and half of the child-raising expenses, reducing the total amount of life insurance coverage needed.
Conversely, let’s say Maria is a single parent. She’s anticipating getting a raise at work and moving from her current house into a larger one with a higher mortgage within the next 10 years.
Maria is on track to be making $90,000 a year and is looking at homes that cost $350,000. In that case, Maria would want to up her coverage based on her near future increase in salary and higher mortgage payment to meet her future needs.
For one more example, let’s say Maria’s resource is a small home she was able to buy at auction. Maria is planning to renovate the home extensively. Property and home value in Maria’s city have been steadily increasing for years.
Maria fixes up the home and rents it out for years, and earns extra income. Over the course of a decade, the home’s value keeps increasing and is worth $150,000. That means Maria’s $50,000 resource is actually worth $150,000. Maria or her family could sell this home to pay off her debts, so Maria might not need to include her debt in her insurance calculations.
As you can see, the right amount of insurance for you depends on your personal situation. Formulas are helpful, but they can only get you so far.
Our best advice?
Follow our steps and use your current financial picture to get an idea of how much life insurance to buy. Once you have that number, sit down with your spouse, a financial planner, or both to adjust that number to your situation.
Frequently Asked Questions About Buying The Correct Amount of Life Insurance
The amount of life insurance coverage to buy is an important decision. It’s understandable if you still have questions. We’ve answered some popular ones below.
What if I can't afford the premiums for the amount of coverage I need?
It’s always important to buy coverage that fits your budget. A policy won’t help your family if you can’t pay your premiums and the policy lapses.
Don’t stretch your budget to fit in an insurance policy. If the premiums you’re being quoted for the coverage amount you’ve figured out are just too high, it’s okay to make adjustments.
You can scale back your coverage amount until you find a premium you can afford. It’s always better to have some coverage than none at all.
However, remember that you might be able to afford more than you think. Make sure you get quotes from multiple insurance companies. By shopping around for the best rates, you can often find affordable coverage that meets your needs.
Do all adults need life insurance?
Generally speaking, yes. You might not need life insurance when you’re very young and don’t have dependents. However, even then, it’s not a bad idea to look into policies. Life insurance costs the least when you’re young and healthy. So, if you can budget a policy in your early 20s, it’s probably a smart move.
You definitely need life insurance once you have people dependent on your income. When you’re married and have children, it’s important to have a life insurance policy.
Your policy will replace your income if you pass away and provide security to your family. Life insurance policies can keep your family in your home and keep them from going into debt. It’s a vital part of any financial plan.
Do stay-at-home parents need life insurance?
Yes. Stay-at-home parents might not have the income to replace, but that doesn’t mean they don’t need any coverage. A stay-at-home parent can still have assets and debts to consider.
Plus, stay-at-home parents are providing a service that has financial value. If the stay-at-home parent were to pass away, the children would still need to be cared for while the surviving parent worked.
For this reason, it’s a good idea to look into the average cost of a year of childcare in your area. You could use this number as a substitute for the stay-at-home parent’s income when you’re calculating how much life insurance they need.
What if my life insurance needs to change later on?
No one can perfectly plan for the future. No matter how many numbers you run, things could change later on, changing how much coverage you need.
Most life insurance policies will allow you to lower your coverage amount later on. You might even be able to do this online, although some companies will require you to call them or send in a request. Once you lower your coverage amount, you’ll get a new reduced monthly premium.
Adding to your life insurance coverage is a little more complicated. If you need additional life insurance coverage, you will have to purchase it in the form of an additional policy.
There is no limit to the number of life insurance policies a person can own, but the overall death benefit must meet financial justification. Insurance companies will not allow someone to over-insure themselves significantly outside of their annual income.
To make sure this doesn’t happen, every insurance company utilizes its own set of income replacement tables. An income replacement table is broken down by age bracket. There is a multiplier that represents the maximum amount of death benefit for each age bracket that can be applied for.
|Age Bracket||Income Multiplier|
|Ages 18 - 40||30x|
|Ages 41 - 50||20x|
|Ages 51 - 60||15x|
|Ages 61 - 65||10x|
*The above income replacement table is guidelines used by Protective Life underwriting. Income replacement tables will vary between different life insurance providers.
It can feel overwhelming to figure out how much coverage you need, but it doesn’t need to be. With a little planning, you find an amount that’s right for your family and needs. If you’re having trouble figuring out an amount, talk to a financial planner.
A financial planner can help you add up all the numbers to get a coverage amount that fits your unique situation. Once you know the coverage amount you need, you can start shopping for policies. You can reach out to an agent to the broker if you’re having trouble finding the specific amount of coverage you need.
If you have a number in mind and are ready to start looking at quotes, you can start right here. At No Medical Exam Quotes, we work with the top no exam companies. We can match with you great policies that don’t require a medical exam for coverage. Fill out our quick form to see quotes today.
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