The short answer
Enough to replace the income your family relies on for as long as they would rely on it, clear your debts, pay for the big costs still ahead, such as your children’s education, and cover final expenses, minus the coverage and savings you already have. That number can be far from the familiar “ten times your income”, in either direction.
Most people choose an amount of life insurance by feel: a round number a friend mentioned, whatever the policy at work happens to be, or the most the monthly budget seems to allow. Cost matters, but it is the second question. The first is what your family would actually need if your income stopped tomorrow. Once you know that, you can decide how much of it to insure and how.
This guide walks through the method most planners start with. It takes about fifteen minutes with a pen, or about a minute with our free Life Insurance Needs Calculator.
Why rules of thumb fall short
“Ten times your income” is easy to remember, and it is not a bad sanity check. But it ignores almost everything that makes your family yours: how much you owe, how old your children are, and what you already have in place.
Picture two households with the same income. One rents, has no children and has savings put aside. The other has a mortgage, three young children and a single paycheck. The rule gives them the same answer. Their real needs could hardly be more different.
The needs method, step by step
Planners call this the needs method or the expense method. You may also see a short version called DIME: debt, income, mortgage, education. It has four parts.
1. Income to replace
Multiply your yearly income by the number of years your family would need it. A common choice is until your youngest child finishes school, or until your spouse or partner reaches retirement.
- Gross or take-home? Gross income is the simplest. Take-home pay, after taxes and retirement contributions, gives a tighter number, because that is what the household actually spends.
- Stay-at-home parents need coverage too. Their income may be zero, but replacing their work is not free. Use what childcare, transport and household help would cost.
- Two incomes? Run the numbers for each earner separately. Each policy should cover the loss of that person’s income.
2. Debts to clear
Add the mortgage balance and other debts, such as car loans, credit cards and personal loans, so that nobody inherits a payment they cannot make.
Student loans need a closer look. Federal student loans are generally discharged if the borrower dies. Private student loans vary by lender, and a cosigner, often a parent, can be left owing the balance. Check your loan agreement before you decide whether to count them.
3. Costs still ahead
This is the money your family will spend in the future that your income would have covered.
- Education. Choose a figure per child that reflects the kind of schooling you would want to fund, then multiply by the number of children.
- Final expenses. Funeral costs, legal fees and medical bills at the end of life.
- People who depend on you outside your home. If you send money to parents or relatives, here or abroad, count the support they would lose. Families who have built a life in a new country often forget this line, and it can be a large one.
4. What you already have
Subtract the life insurance and savings your family could use.
- Coverage through work counts, with care. It usually ends when you leave the job, and it is often only one or two times salary. Many families keep a personal policy so their protection does not depend on an employer.
- Savings should be money your family could really spend. Retirement accounts can count, but withdrawals may be taxed, and that money may be meant for your partner’s own retirement.
A worked example
Here is the method applied to a made-up household: a parent earning $80,000 a year who wants to replace that income for ten years, with a mortgage, two young children and some coverage through work.
- Income to replace: $80,000 × 10 years
- $800,000
- Mortgage $250,000 and other debts $20,000
- $270,000
- Education: 2 children × $50,000
- $100,000
- Final expenses
- $15,000
- Coverage through work (two times salary)
- −$160,000
- Savings the family could use
- −$25,000
- Estimated need
- $1,000,000
“Ten times income” would have said $800,000 here, $200,000 short. For a household with no mortgage and grown children, the same rule could say far more than it needs.
Made-up, rounded figures to show the method. Not a quote, an illustration of any policy, a prediction, or anyone’s real situation.
What the number leaves out
The needs method is deliberately simple, so it is worth knowing what it assumes.
- Interest and inflation. The income figure is not discounted. That assumes whatever your family earns on the money roughly keeps pace with rising prices. If they would invest it, the real need may be a little lower; if prices rise faster than the money earns, it may be higher.
- Taxes on the benefit. Life insurance death benefits are generally not counted as taxable income for the people who receive them, so there is usually no need to add extra for income tax. Interest earned on the money afterwards is taxable, and large estates have their own rules.
- Your own wishes. Some families want to pay off the house entirely, others to fund a business or leave something for grandchildren. The method gives you a starting point; your priorities set the final number.
How long the coverage should last
Look at your list again and notice how much of it shrinks over time. The mortgage is paid down, children grow up and finish school, and savings build. That is why many families cover most of the need with term life insurance, which lasts a set number of years and usually costs the least for the amount of coverage.
Some needs never end, though: final expenses, a child with special needs who will always depend on you, or a wish to leave a set amount to your heirs. For those, permanent coverage can make sense, sometimes as a smaller policy alongside a larger term policy. Our guide to choosing between term and permanent life insurance explains the trade-offs.
When to run the numbers again
Your number is a snapshot. Revisit it when your life changes:
- You marry, divorce or have a child
- You buy a home or take on a large debt
- Your income changes, or you start a business
- A child finishes school, or a parent starts to depend on you
- You leave a job that provided life insurance
Each review is also a good moment to check the beneficiaries on every policy and account.
Run your own numbers
The Life Insurance Needs Calculator does this arithmetic in about a minute, and nothing you type leaves the page. It shows the gap and how it compares with the ten-times rule.
The calculator tells you how much coverage you might need, not what it would cost. Price depends on your age, your health, the type of policy and the insurer, and that is where a conversation helps. If you would like to talk it through, request a free strategy session. If illness or injury could stop your income before death does, read about income protection too.
