How Much Life Insurance Do I Need?

At PolicySimple, we’re here to cut through the noise. This guide’s provisions will help you calculate how much coverage you need most efficiently—without over-purchasing or leaving coverage gaps.

Why the Proper Coverage Level is Important

Life insurance is not a generic product. And a policy that’s too small might not meet your family’s financial needs if you were to die. On the other hand, a policy that’s too big can saddle you with premiums you might not even need.

The goal is to purchase coverage that replaces your financial contribution, pays off any significant debts, and helps your loved ones continue their lifestyle.

Start with the DIME Formula

One of the easiest and most precise ways to estimate life insurance is the DIME method. It stands for:

Debt: Consider all your outstanding debts, including car loans, personal loans, and credit card balances. Your mortgage does not yet count.

Income: Multiply your annual income by the number of years your family would need income replacement—generally, this is in the 10—to 15-year range.

Mortgage: Add the remaining balance of your home loan to ensure your family can keep the house.

Education: Plan on the amount you’ll need for your children’s future education (college tuition, fees, and cost of living).

Example:

Debt: $20,000

Salary: $70,000 a year x 10 years = $700,000

Mortgage: $200,000

Education: $100,000

Amount Requested in Total: $1,020,000

So What If You’re Not the Only Breadwinner?

Even with two incomes, the loss of one can be financially devastating. Life insurance is not simply about paying bills — it’s about maintaining choices and stability.

Moreover, as a stay-at-home parent, your work has economic value. Add up the value of caregiving, transportation, meal prep, and household management that you are no longer providing.

Take into Account Final Expenses and Burial Costs

Even a modest funeral can run $8,000 to $12,000. Don’t let that catch you off guard: Your life insurance policy should be large enough to cover burial or cremation, fees incurred by the legal process, and any unpaid medical bills. This guards against your family having to write checks while they’re grieving.

Don’t forget to consider inflation

Everything you plan to do when you retire will cost more in the future because of inflation.

You must consider inflation if you’ll have the policy for 10, 20, or 30 years. What you think is plenty of coverage today may be inadequate tomorrow. A policy for $500,000 today will not represent the same financial protection two decades from now.

To account for inflation:

Apply a 2–3% annual inflation adjustment in your planning for future income replacement or tuition costs.

Think about laddering several term policies that expire at various points to coincide with stages in your life.

How Much Life Insurance Do People Get?

A rule of thumb among many experts is that coverage needs to be 10 to 15 times your annual income. But this rule of thumb can prove to be tricky if you have a special situation:

• High medical costs or dependents with special needs
• Kids who will be going to expensive colleges
• Mortgages of high value or business debt
• Spouses who will require ongoing care

However, these are just starting points and need to be adjusted based on your financial situation.