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- Many Americans don't have life insurance, and half of those that do don't have enough.
- Online life insurance calculators can help calculate how much life insurance you need.
- For comprehensive coverage, speak with a financial advisor, accountant, and estate planning attorney.
- Compare life insurance quotes with Policygenius.
Many Americans don't have life insurance, and half of those who do, don't have enough. According to a study from Global Atlantic Financial Group, 43% of Americans don't have life insurance. According to Insure, half of Americans who do have life insurance are underinsured, meaning their death benefit would not cover expenses like mortgage, college, food, debts, and clothing for dependents in the event of their death.
If you have employer-provided group life insurance through your job, note that those policies will end if you retire, are laid off, or are terminated. That is why it is best to have a personal life insurance policy as well.
The best option for determining how much life insurance you need is to speak with a financial professional. However, if you aren't ready to make a call yet, online life insurance calculators can help give you estimates as a starting point.
The role of life insurance
The goal of life insurance is to ease the burden on your loved ones after your loss—to cover the mortgage, education, and other expenses. It's important to carry an adequate amount of protection so your dependents are fully covered if you pass away.
How much life insurance do I need?
You'll probably want to get as much life insurance as you can comfortably afford each month. If it would be a struggle to make your premium payments, it's probably too much for you.
Business Insider created three sample scenarios to estimate life insurance needs for people living in Brooklyn, Dallas, and Denver using SmartAsset's life insurance calculator.
Each calculation was based on the following assumptions: a 35-year-old with two kids and a working spouse, with an annual salary of $60,000, owns a median-priced home in their city, plans to pay for children's college tuition at an out-of-state public institution, and has savings and investments.
The charts below show the estimated life insurance policy needed for five different income levels with the above assumptions:
Assessing your financial situation
Income replacement needs
Life insurance replaces your income so the people who rely on you can maintain their standard of living. It covers day-to-day expenses like rent payments, groceries, transportation, and other essential costs.
Although life insurance is widely used to replace income, life insurance for non-income earners may also be as essential. For example, life insurance can cover childcare and household services that a stay-at-home parent would've ordinarily taken care of before they passed away.
Debt and final expenses
An unexpected (or expected in the case of terminal illness) death makes handling debt difficult for those who share financial liabilities with you. Life insurance provides a death benefit to cover outstanding obligations if you were to die.
Life insurance can also cover end-of-life expenses like your funeral service and burial or cremation costs so your loved ones can focus on grieving your passing.
Future financial obligations
In your life insurance calculations, you'll also want to factor in future financial obligations. For example, if you have children, you may want to ensure they have funds for post-secondary education.
Methods for life insurance coverage calculation
10 to 15 times your annual income
When selecting your death benefit amount, the rule of thumb is to select 10 times your annual income. For example, if you make $75,000 per year, you would purchase a life insurance policy for $750,000 to $1,125,000. It is not uncommon for people to get $1 million in life insurance.
If you have children, you may also want to factor in about $100,000 to $150,000 of post-secondary education coverage for each child.
Multiplying your income gives you a rough estimate of how much life insurance you should purchase. You can use it as a starting point, but there are more accurate ways to determine the amount you need.
The DIME formula
The DIME is a more comprehensive method of calculating your coverage needs. DIME entails adding up the following components of your finances:
- Debt: Calculate the total of all your debt (e.g. loans, credit cards, medical bills, etc.), excluding your mortgage. You may also want to include costs for end-of-life expenses.
- Income: Multiply your income by how many years your beneficiaries will likely need it. The Guardian suggests a good place to start is multiplying your income by the number of years until your youngest child graduates high school. However, this amount may be larger if you have lifelong dependents.
- Mortgage: Check your statements to find the outstanding balance of your mortgage. If you have a second mortgage or HELOC (Home Equity Line of Credit) on your home, be sure to include that in your calculations.
- Education: If you have children, anticipate spending upwards of $100k to $150k for post-secondary education for each child.
After adding those up, subtract any current savings or life insurance policies you already carry.
Using an online calculator
You can use online calculators to get an estimate of how much life insurance you will need. Nonprofit organization Life Happens, for instance, offers an online life insurance calculator that asks a few questions so you can get an estimate of the amount of life insurance coverage you may need.
An online calculator doesn't replace the comprehensive advice you would receive from a financial advisor who would look at your financial situation, goals, and estate planning, says Maria Roloff, a wealth advisor at Northwestern Mutual Insurance. However, it will give you an idea of what to expect when you speak with life insurance specialists.
Consulting a financial professional
When considering life insurance, it is wise to consult a financial advisor, accountant, and estate planning attorney to make sure you have the best life insurance coverage for your goals and budget. Your life insurance needs will change as you age and must consider children, marriage, divorce, retirement, and caring for aging parents.
A comprehensive assessment will include whether you need long-term care life insurance, disability insurance, or a combination of permanent and term life insurance. Find someone you trust with knowledge of the different types of life insurance products and a background in estate planning. Business Insider recommends following these steps to find a financial planner.
You can find our guide on the best term life insurance companies here.
Reviewing and updating life insurance coverage
Your life insurance needs will fluctuate as your financial and individual situation does. Regular reviews ensure that your coverage amounts remain accurate over time and you're not overpaying for excessive coverage. For example, you may want to purchase additional insurance if a child enters the family or decrease your insurance when your children become adults and leave home.
Be aware that increasing your policy may mean you have to undergo additional underwriting requirements, such as another medical exam or health questionnaire. Also, if you want to decrease your coverage, some insurers may have limitations.
Calculating life insurance FAQs
How often should I reassess my life insurance needs?
Review your life insurance coverage at least every few years or after significant life events such as marriage, childbirth, purchasing a home, or retirement.
Can life insurance also serve as a savings or investment tool?
Certain types of life insurance policies, like whole life or universal life, include a cash value component that grows your policy's value over time. You can withdraw or borrow from your cash value to pay for financial goals, such as retirement, your child's education, or long-term care expenses.
Do I need life insurance if I'm single with no dependents?
If you're single, life insurance can help you cover debts if you have a co-signer, final expenses, or costs to keep your business running. You can also use life insurance to build a financial legacy for loved ones or donate to charities.
How does my age affect how much life insurance I need?
Generally speaking, your financial obligations decrease over time (i.e., as your children leave the house, your mortgage gets paid off, etc.) So, younger individuals may need more coverage to cover those long-term financial obligations. Older individuals may carry less coverage, instead focusing on covering final expenses and leaving an inheritance.
Are there any online tools to help calculate my life insurance needs?
Many life insurance companies and financial planning websites offer online calculators to estimate your life insurance needs based on your financial situation and goals.
Tanza is a CFP® professional and former correspondent for Personal Finance Insider. She broke down personal finance news and wrote about taxes, investing, retirement, wealth building, and debt management. She helmed a biweekly newsletter and a column answering reader questions about money.Tanza is the author of two ebooks, A Guide to Financial Planners and "The One-Month Plan to Master your Money."In 2020, Tanza was the editorial lead on Master Your Money, a yearlong original series providing financial tools, advice, and inspiration to millennials.Tanza joined Business Insider in June 2015 and is an alumna of Elon University, where she studied journalism and Italian. She is based in Los Angeles.
Ronda Lee is an insurance expert covering life, auto, homeowners, and renters insurance for consumers. In addition to her contributions at Business Insider, she was a writer for insurance aggregator PolicyGenius, as well as an attorney practicing insurance defense and commercial litigation. Aside from insurance coverage, Ronda has written for HuffPost with featured articles in politics, education, style, black voices, and entrepreneurship.
Alani Asis is a personal finance expert covering insurance, retirement, credit cards and more. In addition to writing reviews, guides, and personal finance explainers for Business Insider, Alani was a Mortgage Support Specialist. You can reach her via Twitter at @AlaniAsis.
