How Much Life Insurance Do I Need?

What To Consider When Determining Your Insurance Coverage Amount

Ideally, you want enough life insurance coverage to provide financially for your beneficiaries if something happens to you. This means enough money to cover the loss of your income along with your family’s expenses, debt and long-term goals — such as your kids’ education.

Most insurers suggest at least six to 10 times your annual income, but this may not be the most realistic or accurate way to determine your best amount of coverage.

The ideal amount of life insurance varies from person to person. You should determine the right amount of coverage before buying life insurance.

To determine the right amount of life insurance for you, there are several important factors to consider.

Considerations When Determining the Right Amount of Life Insurance

Income and Retirement

Consider providing enough insurance to cover the loss of your income until your children are at least out of school — and possibly enough to cover your spouse’s income as well if they have to raise young children alone.

Retirement

You should also consider how losing your income will affect your spouse’s retirement plans — and plan on enough life insurance to cover that loss.

Paying Off Final Expenses

You’ll need to have enough money to pay for your funeral and burial expenses. But there are other final expenses you need to cover — including final medical bills, remaining debt, paying off a mortgage and any estate taxes or costs with settling your estate.

Creating a Legacy

You’ll need to consider whether you want to leave money behind for a favorite charity or cause — as well as for other family members, friends or business partners. You should factor those costs into the amount of coverage you choose.

Effects of Inflation

Take the effects of inflation into account for all these considerations. The costs of these expenses will continue to increase after you’re gone. You can use an inflation calculator to estimate how much your family’s financial needs will increase in the future.

Purchasing life insurance can be a sobering experience, since choosing the right amount of coverage means valuing your life and income for your family. Help from a licensed advisor can make this process easier as you discuss what is right for you and your family.

— Stephen Kates, CFP®

How To Estimate How Much Life Insurance You Need

There are several methods for estimating how much life insurance you will need. Two of the most common methods are the “10 Times Rule” and the “DIME Rule.”

10 Times Rule

The 10 Times Rule has long been a rule of thumb in the insurance industry for estimating how much coverage you need.

It simply involves taking your annual income and multiplying it by 10. Some financial professionals suggest adding an extra $100,000 in coverage for each child you have.

The rule has several shortcomings — for instance, it doesn’t work well for single-parent families.

DIME Rule

The DIME Rule gets its name from the four considerations in the acronym for this rule — debt, income, mortgage and education. It covers four of the biggest factors that life insurance typically addresses.

The DIME Rule To Determine Life Insurance Coverage Amounts

Debt

Determine a firm number that accounts for your debt for both parents in the family. Be sure to include final expenses such as medical costs and funeral and burial expenses.

Income

Consider how many years your family would live without your income and multiply that number by the amount of your annual income. Consider potential raises to your income over those years and account for that in your calculations.

Mortgage

Consider this separate from your debt calculation. Provide enough coverage to pay off your mortgage. And determine how many years of property taxes your family will have to pay. Then include those amounts in your life insurance coverage.

Education

Calculate the full costs of educating your kids through high school and college.

Add up the totals from these four categories for a guideline on the coverage needed — and consider doubling that total in case something happens to both parents.

How Much Life Insurance Does the Average Person Have?

The average amount of life insurance coverage was $178,150 for policies purchased in 2019, according to the American Council of Life Insurers. This is far less coverage than what financial advisors typically recommend.

The actual amount of life insurance varies greatly from person to person, based on their individual family’s needs and the type and number of policies individuals own.

Only about 52% of American adults have life insurance, according to a 2022 study by LIMRA, a financial services research and education company. But the study also shows more than a quarter of life insurance owners have only group insurance, which is life insurance provided through an employer. This is typically for a smaller amount than through individual policies and ends when you leave your job.

The total market size of the life insurance industry — including annuities — in the United States was $1.2 trillion in 2022, according to research by industry research firm IBISWorld.