More on Life Insurance
Coverage and Cost
Life insurance overview
How Much Life Insurance Do I Need?
How much life insurance do I need?
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Risks of not having enough life insurance coverage
How to avoid a life insurance coverage gap
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How Long Should My Coverage Last?
How long should my coverage last?
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Life insurance laddering strategy
How Much Does Life Insurance Cost?
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Do pilots pay more for life insurance?
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Life insurance calculator
Policygenius Life Insurance Price Index
Patrick Hanzel, CFP®
Updated April 30, 2021|8 min read
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Buying a life insurance policy is a smart move that ensures financial coverage for your loved ones. How much life insurance you need depends on personal and financial circumstances, but you do need enough to replace your income and cover your dependents' current and future expenses.
You can calculate how much life insurance you need by tallying up your financial obligations and subtracting your liquid assets. Learn more about calculating how much life insurance you need.
Your life insurance coverage should cover your salary, dependents, debts, and other expenses
To calculate how much life insurance you need, subtract your assets from your financial obligations
Once you calculate how much life insurance you need, shop around with an independent broker like Policygenius to get the best possible rates
Nicholas Mancuso, the senior operations manager of Policygenius' advanced planning team, suggests people aim for life insurance coverage that is 10-15 times their income . This number accounts for inflation, market returns, and average household expenses. Policygenius' free life insurance coverage calculator can help you figure out how much life insurance you need and how long your coverage should last.
You can get up to $10 million in life insurance coverage, but the amount of coverage you qualify for depends on your income and overall net worth. For example, someone with a net worth of $100,000 would not be able to obtain a $10 million policy, and coverage between $1 million and $1.5 million would be better suited for their financial profile.
According to Policygenius data from 2020, people in their 30s, 40s, and 50s most commonly purchased policies that provide between $250,000 and $1 million in coverage. Keep in mind, these are the death benefit amounts people have chosen to buy, but they don’t necessarily reflect how much coverage is ideal.
Follow these steps to find out how much life insurance coverage you need:
Tally up your resources (after-tax income and liquid assets, such as cash, checking and savings accounts)
Expenses + debt = financial obligation
Financial obligation - liquid assets = coverage gap
Coverage gap = how much life insurance you should get (plus an additional sum to ensure a financial cushion)
We’ll explain more about how to do this below:
You’ll need to calculate your annual income and how much you own in assets to determine the resources you provide for your family.
Imagine you’re in a four-person household that includes you, your spouse, and your two kids. Assume you earn $65,000 a year and have assets totaling an additional $20,000. These would be your resources .
|Income (before tax)||$65,000|
|Income (after tax)||$50,000|
Adequate life insurance coverage involves taking stock of everything you pay for or your loved ones would need to pay for in the future, should anything happen to you. To start, consider the following:
Your expenses, including the cost of raising children and any debts you may have, should be factored into your life insurance coverage amount. The chart below demonstrates what expenses might look like for a breadwinning parent raising two children, not accounting for each family's unique profile.
Earlier this year, the USDA estimated the cost of raising a child through age 17 was nearly $233,610 for a child born in 2015. The figures below are based on a $12,980 cost per year for each child until they turn 17.
|Five years of household support ($50,000/year income)||$250,000|
|Raising two kids||$467,220|
If you die with outstanding debt, your family may be responsible for all or part of it if they co-signed the loan. For example: if your spouse co-signed your mortgage or your child cosigned a student loan, they might end up bearing the financial burden. They will not be responsible for any debt they haven’t co-signed, but creditors may be able to use your estate to repay debts.
You want to leave enough for your beneficiaries to continue paying off loans, especially if they were secured by collateral that your dependents need to continue using, like your home or the family car.
Your total expenses and debt equals your total financial obligation , which, under these circumstances, is about $1.33 million. Next, subtract your liquid assets ($20,000) from that amount.
After you calculate your long-term financial obligations — based on your individual circumstances and the needs of your loved ones — you can decide how much life insurance coverage you need to buy. To determine how much coverage you should get, simply add up your financial obligations and deduct your assets.
|Financial obligation||Expenses + debt||$1.33 million|
|Coverage gap||Financial obligations - assets||$1.32 million|
For the hypothetical buyer, financial obligation minus assets leaves a $1.32 million coverage gap. This is how much life insurance you should buy.
You can supplement your coverage with life insurance riders, which are provisions to your policy that come at an added cost and offer additional financial security to you and your loved ones while you are alive.
Compare the market, right here.
Policygenius saves you up to 40% by comparing the top-rated insurers in one place.
Another way to calculate how much life insurance you should get is by using the DIME method. DIME is an acronym that stands for D ebt, I ncome, M ortgage, and E ducation. Using the DIME method, you tally up the following to determine how much coverage you should get:
Your income multiplied by the number of years your family will depend on it
The amount left on your mortgage
The cost of your children’s education
The number you get is how much life insurance you should buy. Like our example earlier, imagine you are a parent of two children who is planning to provide them with financial support for the next five years:
According to the DIME method, you would need about $1 million in coverage if this was your personal profile. But from our analysis earlier, you’ll notice that this actually isn’t enough. Because the DIME method doesn’t account for resources you already have or your personal considerations, using this strategy can sometimes lead to getting too much or too little life insurance.
While financial obligations are important, there are other factors you might want to consider regarding your personal circumstances that may influence your life insurance purchase.
The costs associated with raising a child or caring for an aging parent are very high. If you have any dependents, you may need to increase your policy amount by several hundred thousand dollars.
Different circumstances necessitate different coverage needs. Whether you’re an expecting parent or empty-nester, there’s an appropriate amount of life insurance for your specific needs.
If you have kids, you’ll want to factor in the cost of a college education in your decision to get life insurance, as paying tuition can be one of the biggest expenses of adult life. Alongside tuition, getting a college education often includes boarding and other miscellaneous expenses.
Getting the right amount of coverage will require planning for what college will cost in the future, which is likely more than it costs today. According to the College Board, in the last decade, the average tuition at a four-year private college went up by about $19,000.
The average cost of a funeral ranges from $8,000 to $10,000, once you factor in the funeral home and burial costs, like the casket. Many policyholders work these final expenses into their coverage so their families don’t bear the financial burden of final rites on top of the emotional toll of losing a loved one.
Your health and age will determine not only how much insurance you should buy, but how long your coverage should last. The older you get, the less coverage you will likely need, as you will hopefully have less debt and fewer dependents to support.
Age is an important consideration when setting your coverage amount, but is not a reason to put off getting a policy. Life insurance rates increase 4.5-9% every year you age, as older individuals are riskier to insure. If you purchase a policy when you’re young and healthy, you’ll get a more affordable premium for a potentially larger amount of coverage. For that reason, it’s best to lock in lower rates as soon as you can.
How much life insurance can you afford? A life insurance policy isn't useful if you can't pay the policy premiums to keep it active. Higher coverage amounts and longer term lengths equal higher premiums.
You will need to decide between term life insurance and whole life insurance. Whole life insurance can be five to 15 times more expensive than a term policy, so most shoppers — especially those on a budget — should opt for term insurance.
The exact price of a life insurance policy depends on several individual factors including your medical history, lifestyle, and driving record. A licensed insurance agent or broker can talk you through shopping for life insurance and get you personalized quotes.
Compare and buy life insurance
A recent study found that 44% of people  experience a financial impact within six months if their family’s primary wage earner passed away, and 28% would see that impact within a month.
Not getting a face amount or term length that matches your life insurance needs can jeopardize your loved ones’ financial health. Without the right coverage amount to replace your income, your family may not be able to keep up with everyday expenses, plan for the future, or pay for your final expenses, and they may even lose their home or car due to your outstanding debts.
Once you’ve calculated how much life insurance you need, you’re ready to buy coverage. Here’s how to make the process painless and get the best possible policy:
Shop around with a life insurance broker. Policygenius agents will work with you for free to find you the most affordable policy for your profile.
Do your research. Aside from pricing, other factors may be important to you, such as riders or temporary coverage. Make sure your potential provider has what you’re looking for by reading our company reviews.
Get ready to take the medical exam. Check out our guide on the life insurance medical exam so you know what to expect. If you opt for no-medical exam coverage, make sure to get your previous medical records in order.
Get temporary life insurance. Temporary life insurance coverage pays out to your family if you die before your actual policy becomes active.
Calculating how much life insurance you need is pivotal to protecting the long-term financial health of your loved ones. By getting enough coverage and the right policy term length, you can rest assured that your loved ones are taken care of if you’re no longer around to support them.
Experts recommend that you get life insurance coverage that is 10-15 times your income. This ensures you’re getting enough coverage to financially support your family for the long term.
You can determine how much life insurance you need by tallying up your financial obligations and subtracting your liquid assets, such as your savings accounts.
Even if you don’t have an immediate need for life insurance, you should get coverage as soon as possible. The cost of life insurance increases as you age and your health worsens, so purchasing a policy while you're younger is the best way to lock more coverage in at lower rates.
Your loved ones can use life insurance money for virtually any expense. Typically it is used to cover funeral costs, college tuition, mortgage payments, and everyday bills and expenses.
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