How Much Life Insurance Do I Need?

Life insurance is an essential part of your overall financial plan, providing peace of mind that your loved ones will be financially secure if you pass away. The amount of coverage you need varies depending on your financial obligations, assets, and life goals. Here are some methods to calculate how much life insurance you need:

Method 1: Financial obligations minus liquid assets

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

Step 1Step 2
Add up:Subtract:
Your annual salary multiplied by the number of years you want to replace that incomeLiquid assets, such as savings, existing college funds, and current life insurance policies
Your mortgage balance
Any other debts
Any future needs such as college fees and funeral costs
The cost to replace services that a stay-at-home parent provides, such as child care, if applicable

The number you’re left with is the amount of life insurance you need.

Method 2: DIME formula

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

Debt and final expensesIncomeMortgageEducation
Add up your debts, other than your mortgage, plus an estimate of your funeral expensesDecide for how many years your family would need support, and multiply your annual income by that numberCalculate the amount you need to pay off your mortgageEstimate the cost of sending your kids to school and college

By adding all of these obligations together, you get a much more well-rounded view of your needs.

Method 3: Income replacement

With this method, you’ll buy enough coverage that your beneficiaries can replace your income without spending the payout itself. To calculate the amount, divide your annual income by a conservative rate of return, such as 4% or 5%.

When your dependents no longer need the income to meet daily living expenses, the payout can go toward other goals such as college tuition, home buying, or retirement income.

Keep these tips in mind as you calculate your coverage needs:

  • Think of life insurance as part of your overall financial plan.
  • Don’t skimp.
  • Talk the numbers through with your family.
  • Consider buying multiple, smaller life insurance policies.

Use the life insurance calculators on our website to get a more refined idea of how much coverage you need, and then compare that value to these estimates.

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