How Much Life Insurance Coverage Do I Need?

Life insurance is something many people should have, but we often put off getting coverage. If you’ve decided that it’s time to buy a policy, you might be wondering how much life insurance coverage you need. There’s no single answer to this question because insurance plans differ based on various factors.

The good news is there are ways to determine how much coverage you should have. You can either use a life insurance calculator or manually compute the ideal amount of coverage. In this blog, we will help you find your target coverage amount:

Why Do People Buy Life Insurance?

There are different reasons that drive people to invest in a life insurance policy. The most common reasons are financial security and peace of mind knowing that the surviving family will be taken care of in the event of death. Regardless of coverage, life insurance offers the following benefits:

• Covers funeral and burial expenses
• Serves as income replacement
• Pays off outstanding debts
• Protects your loved ones from financial hardship
• Provides funds for tuition and other educational needs
• Covers mortgage payments 
• Supplements retirement income

How To Manually Calculate Life Insurance Coverage

When calculating your insurance, all you need to do is grab a pencil and paper, then follow these basic steps:

Step 1: Calculate your expenses and financial obligations, which may include:

• Household bills
• Mortgage balance
• Any outstanding debts and loans
• College tuition and other fees

Step 2: From that total, subtract your liquid assets like:

• Savings
• Cash on hand
• Cash on bank deposits
• Stocks and bonds
• Existing college funds

The difference between the two numbers is the minimum amount of coverage you need. This gives you a ballpark figure of optimal coverage based on your current standard of living, expenses, and financial resources.

Other Methods for Calculating Life Insurance Coverage

Years-Until-Retirement Method

Some life insurance plans can be converted into a retirement income. If you want to use insurance for retirement planning, the years-until-retirement method can determine the necessary coverage. This method involves multiplying your annual salary by the number of years left until retirement. 

Imagine a 50-year-old individual who wants to retire by the age of 65. If he or she has an annual income of $50,000, the minimum coverage should be $750,000. 

Multiply Your Income by 10

This is a simple way to get a rough idea of how much life insurance you need. Just take your gross income and multiply it by 10 times. If you’re making $50,000 per year, you should get an insurance policy with a payout of at least $500,000.

For people with children, you may consider adding $100,000 to that amount for each child’s college tuition fees. This way, your policy will give your family a comfortable financial cushion and get your children through college.

The DIME Method

Another method you can try is called DIME, which stands for debt, income, mortgage, and education. These are the four key factors to consider when making a detailed estimated insurance coverage. 

Debt: Total all your debts like credit cards, car payments, and student loans. Excluding mortgage, how much debt would you leave to your loved ones? If you have any of these outstanding debts, you should buy insurance that can pay them off in full. It’s also necessary to add some buffer for extra interest and other charges.

Income: Life insurance is often used to replace lost income for the surviving family. To calculate the optimal coverage, multiply your income by the number of years your family would need support. 

Mortgage: Next step is to look at the amount left on your mortgage loan. Determine how much you owe on your home and add your mortgage balance to your running total. Your insurance coverage should be enough to pay off your mortgage so that your dependents won't have to deal with it when you pass on.

Education: The last factor in the DIME approach is education expenses. These include the anticipated college costs for each of your children. Sufficient insurance coverage can pay off tuition fees, room and board, and the day-to-day expenses of each child. 

The Bottom Line

If unsure about your life insurance coverage, speak to a financial advisor who can guide you through the process. Our agents at Local Retirement Group are always one consultation away whenever you have questions about insurance.