How Much Life Insurance Do I Need?

You can’t pinpoint the ideal amount of life insurance you should buy down to the penny. But you can make a sound estimate if you consider your current financial situation and imagine what your loved ones will need in the coming years.

In general, you should find your ideal life insurance policy amount by calculating your long-term financial obligations and then subtracting your assets. The remainder is the gap that life insurance will have to fill. But it can be difficult to know what to include in your calculations, so there are several widely circulated rules of thumb meant to help you decide the right coverage amount. Let’s look at a few of them.

Rule of thumb No. 1: Multiply your income by 10.

“It’s not a bad rule, but based on our economy today and interest rates, it’s an outdated rule,” says Marvin Feldman, president and CEO of insurance industry group Life Happens.

The “10 times income” rule 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.

Both parents should be insured, Feldman says. That’s because the value provided by the stay-at-home parent 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.

Rule of thumb No. 2: Buy 10 times your income, plus $100,000 per child for college expenses

Education expenses are an important component of your life insurance calculation if you have kids. This formula adds another layer to the “10 times income” rule, but it still doesn’t take a deep look at all of your family’s needs, assets or any life insurance coverage already in place.

Rule of thumb No. 3: 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 consider 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. The multiplier might be the number of years before your youngest child graduates from high school.

Mortgage: Calculate the amount you need to pay off your mortgage.

Education: Estimate the cost of sending your kids to college.

The formula is more comprehensive, but it doesn’t account for the life insurance coverage and savings you already have, and it doesn’t consider the unpaid contributions a stay-at-home parent makes.

How to find your best number

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

  1. Calculate obligations: Add your annual salary (times the number of years that you want to replace income) + your mortgage balance + your other debts + future needs such as college and funeral costs. If you’re a stay-at-home parent, include the cost to replace the services that you provide, such as child care.
  2. From that, subtract liquid assets such as: savings + existing college funds + current life insurance.


To illustrate, let’s look at a fictional couple: Jason and Heather. They have two children, ages two and five. Jason makes $75,000 a year, and Heather is a full-time stay-at-home mom. They have a $150,000 balance on their home mortgage, owe $16,000 on two car loans and have $3,000 in credit card debt.

Jason has group life insurance equal to double his annual salary, and Heather has none. Together, they have $20,000 in a savings account and $10,000 in their kids’ college funds.

The couple decide that they want 30-year term life insurance policies. By the end of the term, their children will be adults, their mortgage will be paid off, and, if they stick to a savings plan, the remaining spouse will have a retirement nest egg.

To calculate his life insurance needs, Jason would add his obligations:

  • $1.2 million for income replacement ($75,000 times 16, the number of years before his youngest child graduates from high school)
  • $150,000 for the mortgage balance
  • $19,000 for debt  ($16,000 in car loans, plus $3,000 in credit card debt
  • $200,000 for two childrens’ college educations
  • $7,000 for final expenses  — approximately the median cost of a funeral with a casket, according to the National Funeral Directors Association

This totals $1,576,000. From this, Jason would subtract:

  • $20,000 in savings
  • $10,000 in the kids’ college funds
  • $150,000 of group life insurance

This means that Jason should buy a $1.4 million ($1,396,000) term policy.

Here’s how a calculation would work for Heather. Her obligations would include:

  • $100,000 to replace the child care that she now provides, until the kids are teenagers
  • $150,000 for the mortgage balance
  • $19,000 for debt
  • $200,000 for two children’s college educations
  • $7,000 for final expenses

This totals $476,000. From this, she would subtract $30,000 to account for the couple’s savings and their kids’ college funds. Her final estimated life insurance need is $450,000 ($446,000).

Heather might also want to figure income replacement into her policy, says Johanna Fox Turner, a partner of Milestones Financial Planning and president of Fox & Co. CPAs, Inc., in Mayfield, Kentucky. She notes that the surviving parent might want to quit work to take care of the kids for a few years — in which case, the stay-at-home parent’s policy should include income replacement, rather than child care costs, for those years.

When Should You Buy Life Insurance?


If no one depends on your income for support, you probably don’t need life insurance at all.
Your need for life insurance changes with the stages of your life, starting with no need when you’re young, progressing to greater and greater need as you take on more and more responsibility, and finally beginning to diminish as you grow older.

When you’re single

Sad though your death would be, it’s unlikely it would create financial hardship for anyone. Any honest financial assessment of your situation would have to conclude that you have little or no need for life insurance. An argument could be made that you should buy a policy now while you’re young and rates are low. And if someone — a parent, say — depends on you for financial support, then by all means, consider life insurance.   But consider the interest you could earn by saving and investing your money instead of spending it on insurance premiums. Still, if somebody — a parent, a grandparent — wants to buy you a policy now to lock in low rates for later in your life, accept it gratefully.

Love and marriage

Married couples with no children may need little or no life insurance, especially if both spouses contribute equally to the household income.

The death of either spouse would not be financially catastrophic; the other could presumably survive on his or her own income. Still, it could be a strain. Perhaps the survivor couldn’t afford the mortgage or rent payments on a single income, or maybe you have big credit card debts. Also, there would be funeral costs.Each of you should probably buy a modest amount of life insurance to protect the other.

Married with children

A one-income family with young children is the classic high-need situation. Basically, all of these people are dependent on one breadwinner for their total support , so insurance on that life is vital. And if the nonearning spouse should die, the other would have to pay for child care — a very expensive proposition that argues for insurance on both lives. This same high-need situation exists for dual-income households with children, for single parents, and for those caring for elderly parents who have limited resources of their own

The golden years

The kids have grown and are making it on their own. You have a pension and considerable assets that can be used to generate a good income after you die. In circumstances like this, you clearly don’t need as much life insurance as you once did.

The one caveat here is estate planning. If your estate is large enough to be subject to the estate-tax when you die, your heirs can use the death benefit to pay the IRS. If the policy is held by a trust, the benefit would not be counted as part of your estate.

If you fall into this category, consider a whole life policy. Since you don’t know when you will die, you’ll need to hold on to your coverage indefinitely.




Keeping a Family and a Business Afloat.

Keeping a Family and a Business Afloat

Family Term Life Insurance.

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Review Life Insurance Needs and Coverage Annually.

Review Life Insurance Needs and Coverage Annually
Some things need regular maintenance for them to function for you. You need to check your car’s fluids and tire pressure occasionally, and do some preventative maintenance. Same with your lawn mower. Children need occasional doctor visits and immunizations. Life insurance is no different. To ensure that your life insurance is up to date and covers your family’s evolving needs, it’s a good idea to schedule a once-per year life insurance review, in person, with a qualified, licensed insurance professional.

Is your Coverage Current?

There are a number of things that can occur that can cause a need to make a change in your coverage:

  • Did you get married?
  • Did you have a child?
  • Did you adopt a child?
  • Did you get divorced?
  • Did a spouse die?
  • Did your debt level change? For example, did you purchase a house on a mortgage? Did you pay one off?
  • Have interest rates changed since you last shopped for insurance?
  • Have you retired? Does your family rely more on savings than on your income from work? It may be time to consider a tax-free exchange for an annuity designed to generate income and preserve savings.
  • Has your income changed?
  • Are you now a partner in a company?
  • Do you have a key employee?
  • Did you inherit a substantial amount money or property?
  • Will your parents rely on you for financial assistance or support?
  • Have you lost weight?
  • Have you quit smoking?


Do I have a sound life insurance strategy in place?

Any of these common life changes can precipitate the need for a significant change in life insurance coverage. But even if you haven’t undergone one of these life-changing events, it’s still a good idea to have a good heart to heart with your insurance agent on an annual basis. Here are some reasons to start with:

Options may expire. If you’ve had a policy for a while, you may have some options to purchase additional coverage expire soon. It may be time to sit down and review your options and see if you want or need the additional coverage. This is especially true if your health has declined, or you’ve gained weight. You may not have another chance to purchase life insurance at your original rating.

You may want to convert term life insurance to a permanent insurance policy. Term insurance provides the most face amount per dollar of monthly premium now – but it is very expensive over the course of a lifetime. Your agent can review your options and help you select the best strategy for you.

There may be new solutions and products available that may suit your needs that weren’t available a year ago. Life insurance companies are constantly evolving, looking to uncover customers’ needs and provide solutions to enhance their financial security. For example, your company may now offer a useful new rider or other benefit.

Regular reviews are also important to prevent unwanted lapsing of insurance policies. These are particularly important if you own a universal life policy and you have been paying premium out of cash value. Even if your existing insurance policy is with another company, you can still review it with us. If you qualify, an exchange may be warranted.

We’d like to invite you to schedule a no-obligation personal life insurance needs review. The purpose is to look at your current coverage and how well it dovetails with your personal financial needs, goals and risks. From there, we will determine if your current life insurance strategy still meets your needs, or if a change is warranted.

If you have a permanent policy, with cash value – whether it’s a whole life, universal life, or equity-indexed universal life policy, we can also explore some strategies that may be available to you to make use of the substantial living benefits of these policies

Individual Health Insurance

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