How Much Life Insurance Do I Need?

You can’t take it with you, but the right life insurance policy will make sure you leave enough behind. This valuable financial tool lets you support your dependents in the event of your death, but figuring out how much life insurance you need can be a challenge. Of all the calculation methods and formulas out there, how do you determine which one makes the most sense for you and your family?

CNBC Select explains how you can approach calculating how much life insurance you need and which factors to consider when crunching the numbers.

Determining your life insurance needs

What kind of life insurance do you need — if any?

The first thing to evaluate is whether you need life insurance at all.

You should strongly consider getting a policy if your family depends on the income you earn, but that’s not the only scenario where buying life insurance is a good idea. If you’re the primary caregiver for someone who can’t take care of themself, for example, a life insurance policy could help pay for hired help after you pass. Small business owners may also want a policy to help the company fund necessary operations in the immediate aftermath of your death.

On the other hand, if you don’t have anyone financially dependent on you, you might not need to purchase a life insurance policy at the moment. Instead, you can save or invest in other assets.

Choosing between term or whole life insurance

If you’ve decided you need life insurance, the next step is to choose what kind of policy would work best for your situation.

Generally, term life insurance is more affordable than whole life insurance. It’s active for a set period — between 10 and 30 years — and doesn’t offer any payout if you outlive the term. That’s fine for someone who wants a life insurance policy that covers them for the period when their death would inflict the most financial harm on their dependents. For example, if your family has recently welcomed a new baby, a 20-year term could be sufficient. This way, in case of your death, your child would have financial support until their 20s when they can begin earning their own income.

Term life insurance policies can usually be converted into permanent coverage if you’re willing to pay for it. For example, Guardian, our top pick for the best term life insurance, allows you to convert to a permanent life insurance policy without a new medical exam. You can also add a rider to have the option to convert at any time while the policy is active.

Guardian Life Insurance

  • Cost

    The best way to estimate your costs is to request a quote

  • App available

  • Policy highlights

    Guardian offers a variety of policies, including term, whole and universal. It also offers term policies that can be converted into whole or universal life policies, along with strong financial strength ratings.

Whole life insurance, on the other hand, covers you for life (as long as you keep paying your premiums). It also lets you contribute to your policy’s tax-deferred cash value that earns interest. Some policies even pay dividends to policyholders. Whole life insurance is much more expensive than term life insurance, but it may be worth the cost if you want your policy to provide the maximum amount of protection to your dependents.

Some people also use whole life insurance as an investment vehicle to grow their retirement funds. This strategy might make sense if you’re already maxing out your 401(k) and IRA accounts. It’s also important to find an insurer with a proven track of financial security and cash value growth. For instance, MassMutual offers highly customizable policies and boasts impressive ratings for financial strength.

MassMutual Life Insurance

  • Cost

    The best way to estimate your costs is to request a quote

  • App available

  • Policy highlights

    MassMutual has been in business for over 170 years, and carries the highest ratings for financial security from AM Best. 

Methods of calculating your life insurance needs

You can use one of the popular models to get an idea of how much life insurance you need. Remember that these can only give you a rough estimate of your needs, and you want to tailor your policy to your specific goals and circumstances — preferably with the help of a financial advisor.

10 times your income

Perhaps the most well-known calculation model is multiplying your annual income by 10. For example, if you make $100,000 per year, you’ll need $1 million in life insurance. In another version of this rule, you’ll add an extra $100,000 per child to cover the costs of their education.

This approach is simple — and simplistic. It doesn’t consider your family’s living expenses, as well as assets that you already have. Further, it doesn’t account for the debts you might owe.

DIME method

Another popular method is called DIME, which stands for Debt, Income, Mortgage, Education. Here’s how it works:

  • Debt: Add up all the debt you would leave to other people after your death.
  • Income: Multiply your annual income by the number of years you think your family will need your financial support after your death.
  • Mortgage: Add up your mortgage’s running total plus the property taxes. To find how much to add for property taxes, multiply the annual tax by the number of years your family will rely on your money in your absence.
  • Education: Estimate how much it will cost to put each of your children through college.

A sum of these numbers is going to be the amount of life insurance coverage you need. This approach aims to leave the beneficiaries with enough money to cover living expenses. While it’s more nuanced than multiplying your income by 10, it still doesn’t account for the assets you might already have which your family can tap into. If you have additional financial resources, the DIME method can lead to you buying more insurance than you need.

Human-life approach

The human-life value (HLV) approach attempts to calculate how much money you (the person who is insured) would provide to your beneficiaries for a set amount of time and then determines how much life insurance you need to buy now to replace that income after you die. Here’s how to calculate it:

  • First, you’ll need to estimate your average annual income for the rest of your earning years. Try to account for any potential raises, but also err on the side of caution here — while not ideal, it’s better to be a little over insured than to leave your family in a tight spot.
  • Now, subtract how much of this money you’d expect to spend on yourself (the model assumes the rest goes to provide for your dependents). This includes your personal annual taxes and expenses.
  • Next, consider how long your family will need to rely on your future earnings (such as until your retirement or until your children can earn an income). Then multiply the net annual salary your beneficiaries will need by the number of years they will need it. The result is your future earnings (otherwise known as “future value”) that your policy is trying to replace.
  • The final step is to calculate the present value of your future earnings (i.e. how much life insurance you need to buy now). Because your death benefit will likely be held in an interest-bearing account, assume it will earn a conservative rate of return of 5% (which is around what U.S. Treasury bills or notes currently earn). For the purposes of the HLV calculation, this rate of return is called the “discount rate.” Now, you can figure out the present value manually with the formula PV = FV÷ (1 + discount rate)time period or by using a calculator.

HLV math example

HLV uses more advanced calculations compared to simpler methods, so it might be helpful to consider an example. Let’s say you expect to make $80,000 per year on average for the rest of your career. You’ll spend $24,000 on your own taxes and expenses and use the rest ($56,000) to support your family who will rely on your earnings until you retire in 15 years. This brings your future earnings to $840,000. Adjusted for the 5% discount rate, their present value is $404,054. This number is how much life insurance you need to buy.

What to consider when buying life insurance

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.


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