How much life insurance do I really need?

There’s no single answer to that question, but there are ways to make it easier to choose a policy that fits your current and future needs. This life insurance calculator can help.

Manually Calculate How Much Life Insurance You Need

You can determine how much life insurance you need by using this equation:

[Financial obligations you want to cover] – [existing assets that can be used toward bills] = Your life insurance need.

Here’s what you might want to include under the “financial obligations you want to cover” umbrella:

• Income replacement: Multiply the salary you want to replace by the number of years you want to replace it. You want this income replacement to cover current and future expenses.
• A mortgage: You can include the balance of a mortgage to ensure your family stays in their home without fear of losing it. If the above income replacement already covers your mortgage payments and other expenses, then there’s no need to add more mortgage money.
• Other large debts: Would your family struggle with other large debts if you passed away unexpectedly? If so, make sure to add it in.
• Children’s college tuition: Add tuition money to ensure your children can pay for college if you are no longer around.

Here’s what you could include in “existing assets that can be used toward bills”:

• Existing life insurance: If the other life insurance is already in place to provide a financial cushion, subtract that amount. Be careful of relying on supplemental life insurance from work though—since it doesn’t go with you if you leave a job, you can’t be sure you’ll have it later.
• Savings: Subtract any savings your family would use to pay expenses. You can include retirement savings such as a pension plan or leave it out of your analysis if your beneficiaries want to preserve that amount for retirement years.
• College savings: If you have a college savings account with money in it for your children, you can subtract it from your life insurance needs.
• Funeral expenses: Many people want life insurance to cover funeral and final expenses. If this cost isn’t part of a larger policy, some people buy burial insurance.

The DIME Method

DIME stands for debt, income, mortgage, and education. The method requires you to add up these amounts:

• Debt: How much debt would you leave to other people? This could include credit card debt and student loans that aren’t forgiven at death.
• Income: Multiply your income by the number of years you want to provide income replacement for your family. Some sites advise using the number of years until your youngest child turns 18, but we all know that children often need financial help longer than that.
• Mortgage: Add your mortgage balance to your running total.
• Education: Add an amount that covers tuition, room, and board for each of your children who will go to college. The College Board regularly publishes trends in college pricing.

The DIME method is a good start for calculating a life insurance need, but it ignores existing financial resources that your family might tap for expenses. By itself, it could leave you over-insured.

What’s The Rule of Thumb for How Much Life Insurance You Need?

A common rule of thumb for determining how much life insurance you need is to multiply your salary by ten. Some experts recommend multiplying it by 5 or 7.

That may be a simple way to determine how much you need, but it’s not a good method.

The best way to find out how much life insurance you need is to add up the financial obligations you want to cover, such as income replacement, or a mortgage, and then subtract assets that could be used by your family such as savings or existing life insurance.

If you’re not sure, speak to a financial advisor who can help you determine your needs.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)