It’s hard to pinpoint how much life insurance you should buy down to the penny, but you can make a good estimate by using our life insurance calculator below.
In general, you should add up your long-term financial obligations, such as mortgage payments or college fees, and then subtract your assets. The remainder is the gap that life insurance will have to fill.
» MORE: The best life insurance companies
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Life insurance calculator
This life insurance calculator uses your existing assets and debts to figure out how much life insurance coverage you need.
» MORE: Compare life insurance quotes
How to manually calculate how much life insurance you need
Follow this general philosophy to find your own target coverage amount: financial obligations minus liquid assets.
Step 1: Add up the following items to calculate your financial obligations.
Your annual salary multiplied by the number of years you want to replace that income.
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.
Step 2: From that total, subtract liquid assets, such as savings, as well as existing college funds and current life insurance policies. The number you’re left with is the amount of life insurance you need.
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4 more ways to estimate how much life insurance you need
If you want to quickly determine your existing life insurance needs, an estimate can be an easy way to get a value. These methods are better than a random guess but often fail to account for important parts of your financial life.
Use the life insurance calculators above to get a more refined idea of how much coverage you need, and then compare that value to these estimates.
1. Multiply your income by 10
The “10 times income” guideline is often shared online, but it 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, who should have coverage even if they don’t make an income.
The value of a stay-at-home parent’s work 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.
2. Buy 10 times your income, plus $100,000 per child for college expenses
This formula adds another layer to the "10 times income" rule by including additional coverage for your child’s education. College and other education expenses are an important component of your life insurance calculation if you have kids. However, this method still doesn’t take a deep look at all of your family’s needs, assets or any life insurance coverage already in place.
3. Use 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 account for 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.
Mortgage: Calculate the amount you need to pay off your mortgage.
Education: Estimate 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. However, while this formula is more comprehensive, it doesn’t account for the life insurance coverage and savings you already have. It also doesn’t consider the unpaid contributions a stay-at-home parent makes.
4. Replace your income, plus add a cushion
With this method, you’ll buy enough coverage that your beneficiaries can replace your income without spending the payout itself. Instead, they can save or invest the lump sum and use the resulting income to pay expenses.
To calculate the amount, divide your annual income by a conservative rate of return, such as 4% or 5%. As an example, let’s assume your income is $50,000 and you estimate a 5% rate of return. The math works like this: $50,000 divided by 5% equals $1 million. So if you buy a million-dollar life insurance policy and your beneficiaries put the payout into a bank account earning 5% annual interest, they can expect to generate $50,000 a year to replace your income.
When your dependents no longer need the income to meet daily living expenses, the $1 million can go toward other goals such as college tuition, home buying or retirement income.
To use this method for a stay-at-home parent, first add up how much it would cost each year to pay someone else to handle that parent’s tasks. Then plug that number into the formula as if it were the stay-at-home parent’s annual income.
» MORE: Who needs life insurance?
Tips for calculating how much life insurance you need
Keep these tips in mind as you calculate your coverage needs:
Think of life insurance as part of your overall financial plan. That plan should take into account future expenses, such as college costs, and the future growth of your income or assets.
Don’t skimp. Your income likely will rise over the years, and so will your expenses. While you can’t anticipate exactly how much either of these will increase, a cushion helps make sure your spouse and kids can maintain their lifestyle.
Talk the numbers through with your family. How much money does your spouse think the family would need to carry on without you? Do your estimates make sense to them? For example, would your family need to replace your full income or just a portion?
Consider buying multiple, smaller life insurance policies. You can buy more than one life insurance policy to vary your coverage as your needs ebb and flow. For instance, you could buy a 30-year term life insurance policy to cover your spouse until your retirement and a 20-year term policy to cover your children until they graduate from college. Compare life insurance quotes to estimate your costs.
» MORE: Best life insurance for children
Term vs. whole life insurance tool
Term life insurance lasts for a set period of time, such as 10, 20 or 30 years. So, when calculating coverage, think about how long you want your term policy to last. For example, if you need life insurance to cover your income until your kids go to college, you may need a 20-year policy. Alternatively, if you want to cover your mortgage, you may need a 30-year term policy.
Whole life insurance can last your entire life, so you’ll want to take into account final expenses, such as burial costs. Your insurance needs may change over your lifetime, so consider any future plans like buying a house or having a family.
Use the tool below to determine which type of coverage is best for you.
» MORE: Term vs. whole life insurance: Differences, pros and cons
