Life is unpredictable, and while you cannot control certain aspects, you can always take measures to be prepared for it. Life insurance is one of the best ways to protect your loved ones even when you are not around. However, the question, ‘How much life insurance do I need?’ can be daunting, especially for those new to life insurance. We have key factors that may impact your decision on how much life insurance you purchase for yourself and your loved ones.

Which is better term or life insurance?

Term Vs. Whole Life Insurance: Which is Better?

There are two types of life insurance policies: term and whole life. Both offer different benefits and drawbacks, so deciding which is best for you can be challenging. Before we get into the nuts and bolts of calculating how much insurance you’ll need, let’s explore the differences between term and whole life insurance to help you make an informed decision.

Term Life Insurance

Term life insurance is the simplest and most affordable type of life insurance policy. It provides coverage for a specific period, usually between 10 and 30 years. If you die during the insurance term, your beneficiaries receive a lump sum payment they can use for expenses like funeral costs, living expenses, and debts. Once the term ends, the coverage stops, and you have to renew the policy or purchase a new one. Term life insurance rates are generally low, making it a popular option for young families. What’s more, if your employer offers life insurance, chances are it is a term policy. If this is the case, remember the coverage likely expires should you ever leave the company.

Whole Life Insurance

Whole life insurance, also known as permanent life insurance, provides coverage for a lifetime. It combines a death benefit with an investment component, allowing you to accumulate cash value over time. The premiums are significantly higher than term life insurance but remain the same throughout your life. The policy’s cash value grows tax-deferred and can be used as collateral for loans or withdrawn as retirement income. Whole life insurance is a good option for people who want lifelong protection and investment opportunities.

Life Insurance Calculators

The internet provides several life insurance calculators that help determine how much life insurance you need. When you calculate life insurance coverage needs, there are vital factors such as existing insurance policies, savings, debts, and education expenses these tools consider. By using an online life insurance calculator, you can determine the appropriate amount of coverage that meets your family’s needs.

Manually Calculate Your Need

When considering life insurance, it’s essential to determine the appropriate coverage amount to provide financial protection and security for your loved ones. To do this, you should subtract your financial obligations from your liquid assets.

Your financial obligations may include your salary, mortgage balance, debts, future needs, and stay-at-home parent services. These are the expenses your loved ones would need to cover during your unexpected passing. On the other hand, your liquid assets are the funds your loved ones can access quickly. These may include savings you’ve accumulated, existing college funds, and any life insurance policies you currently have in place.

After subtracting your financial obligations from your liquid assets, you’ll have the necessary life insurance coverage amount. This number is the minimum you should consider when buying life insurance to protect your family from financial hardship should the worst occur. It’s critical to adjust your coverage amount regularly to accurately reflect your family’s evolving financial needs. Doing so can provide peace of mind and support for your loved ones, even after you’re gone.

There are different formulas to help you calculate how much life insurance you may need

There are different formulas to help you calculate how much life insurance you may need

Quick Formulas to Consider When Calculating Life Insurance Needs

If manually calculating your need seems like a daunting task, there are some quicker, though less accurate, methods.

The “10 Times Income” Guideline

The “10 times income” rule of thumb is a straightforward formula that multiplies your annual income by ten, giving the coverage amount. However, this method doesn’t consider savings, already-existing insurance policies, or stay-at-home parents. The “10 times income” plus $100,000 formula attempts to factor in college expenses but falls short of providing a detailed look at the family’s needs and assets.

The DIME Formula

The DIME formula is an improved method with more calculations. This formula considers debt, income, mortgage, and education expenses but does not account for existing insurance policies and savings that can significantly affect your planning process.

The “Replace Your Income Plus a Cushion” Method

This method focuses on purchasing coverage that enables you to replace your income without utilizing the payout amount directly. This approach is suitable for stay-at-home parents and considers continuing expenses, including providing a cushion for unplanned costs. This method provides the most robust plan for your family.


Additional Tips to Help Determine How Much Life Insurance You Need

When considering a life insurance policy, there are some important things to remember.

Life Insurance Needs Change

Our financial needs and obligations change throughout our lives, affecting the type and amount of life insurance we need. When we are young and single, we may not have many financial responsibilities beyond paying rent and student loans. Still, our financial obligations increase as we age and start a family. We may want to increase our life insurance coverage as these changes occur.

Provide a Cushion

It’s important to build a cushion into your coverage. This means ensuring your policy offers enough coverage to pay off any outstanding debts or future expenses and leave some extra funds behind for your loved ones to use as they adjust to life without you. With the right amount, you can ensure your family will be financially secure even if the unexpected happens.

Discuss with Family

Discussing a potential life insurance policy and needs with your spouse may seem daunting. However, it is an important one. Start the conversation by asking your spouse if they have thought about life insurance and their thoughts on it. Discuss the amount of coverage needed and who would be the beneficiaries.

Make sure to also review your policies regularly to ensure you still have enough life insurance to meet your current needs. Expenses to consider as you get older that you may not have considered before include:

  • College tuition for any children you may have.
  • Mortgage payments.
  • Car loans
  • Funeral expenses

The conversation about your current financial situation or what may happen in an untimely death may not be easy, but it can provide peace of mind for both you and your spouse, knowing you have each other’s back.

Work with a financial advisor to determine how much life insurance you need

Work with a financial advisor to determine how much life insurance you need


Life insurance can give you peace of mind by helping you know your loved ones will be cared for even when you are not around. Determining how much coverage is right for you depends on income, expenses, debts, education, age, health, and future goals. If you need help determining how much life insurance you need or if you should update your policy, contact a financial advisor who can help answer your questions and guide you toward a life insurance policy that helps cover your financial needs.

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