How Much Life Insurance Do I Need

Dated: August 17 2018

Views: 1100

How Much Life Insurance Do I Need?


Start by calculating your long-term financial obligations, then subtract your assets. What's left is the gap that life insurance will have to fill.

You can’t pinpoint the ideal amount of life insurance you should buy down to the penny. But you can make a sound estimate if you consider your current financial situation and imagine what your loved ones will need in the coming years.
First, let's confirm that life insurance is appropriate for you.

Does anyone depend on you financially?

Rule of thumb No. 1: Multiply your income by 10.

“It’s not a bad rule, but based on our economy today and interest rates, it’s an outdated rule,” says Marvin Feldman, president and CEO of insurance industry group Life Happens.

The “10 times income” rule doesn’t take a detailed look at your family’s needs, nor does it take into account your savings or existing life insurance policies. And it doesn’t provide a coverage amount for stay-at-home parents.

Both parents should be insured, Feldman says. That’s because the value provided by the stay-at-home parent needs to be replaced if he or she dies. At a bare minimum, the remaining parent would have to pay someone to provide the services, such as child care, that the stay-at-home parent provided for free.

Rule of thumb No. 2: Buy 10 times your income, plus $100,000 per child for college expenses

Education expenses are an important component of your life insurance calculation if you have kids. This formula adds another layer to the “10 times income” rule, but it still doesn’t take a deep look at all of your family’s needs, assets or any life insurance coverage already in place.

Rule of thumb No. 3: The DIME formula

This formula encourages you to take a more detailed look at your finances than the other two. DIME stands for debt, income, mortgage and education, four areas that you should consider when calculating your life insurance needs.

Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.

Income: Decide for how many years your family would need support, and multiply your annual income by that number. The multiplier might be the number of years before your youngest child graduates from high school. Use this calculator to compute your income replacement needs:

Mortgage: Calculate the amount you need to pay off your mortgage.

Education: Estimate the cost of sending your kids to college.

The formula is more comprehensive, but it doesn’t account for the life insurance coverage and savings you already have, and it doesn’t consider the unpaid contributions a stay-at-home parent makes.

How to find your best number

Follow this general philosophy to find your own target coverage amount: financial obligations minus liquid assets.

  1. Calculate obligations: Add your annual salary (times the number of years that you want to replace income) + your mortgage balance + your other debts + future needs such as college and funeral costs. If you’re a stay-at-home parent, include the cost to replace the services that you provide, such as child care.

  2. From that, subtract liquid assets such as: savings + existing college funds + current life insurance

blog credit to 
BARBARA MARQUAND July 28, 2017

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Ryan Lopez

Born and raised in the small town of New Iberia, Louisiana. Later graduated from college with a associates degree in computer networking. Went on to a 20 year career in the oil and gas industry. Now h....

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