How much life insurance do I need? 3 ways to work it out
A rule of thumb is a starting point, not an answer. Here are three simple methods, the DIME method, income replacement and a needs worksheet, with a worked example you can copy with your own numbers.
You need enough life insurance to pay off what you owe, replace the income your family relies on for as long as they rely on it, and fund the goals you would want finished without you, minus the savings and coverage you already have. For a young family that often lands at many times annual income. For a retired couple with a paid-off home it may be just enough for final expenses and a cushion for the surviving spouse. The three methods below get you to a number in about fifteen minutes.
Start with the question life insurance answers
Life insurance answers one question: if your income or your work at home stopped tomorrow, what would the people who depend on you need, and for how long? Insure the people whose lives would change financially if you were gone. That usually means a spouse or partner, children, sometimes aging parents or a business partner.
If nobody depends on your income, you may need only enough to cover final expenses and any debts that would fall to someone else.
Business owners have another layer. If you own a business in the East Valley with a partner, life insurance can fund a buy-sell agreement so the surviving owner can buy your share from your family at a fair price. Key person coverage can help a business survive the loss of someone essential. Those needs sit on top of your family's needs.
Method one: DIME
DIME is a quick checklist that stands for Debt, Income, Mortgage and Education. Add the four together.
The example figures are illustrations only. Use your own numbers, and keep the result as a ceiling to refine with the methods below.
| Letter | What to add up | Example |
|---|---|---|
| D: Debt | Car loans, credit cards, personal loans, plus final expenses | $25,000 |
| I: Income | Annual income times the years your family would need it | $60,000 x 10 = $600,000 |
| M: Mortgage | The payoff balance on your home | $280,000 |
| E: Education | What you want set aside for children’s schooling | $80,000 |
| Total need | Before subtracting what you already have | $985,000 |
Method two: income replacement
This method asks how many years of income your family would need and multiplies. A common approach is to cover the years until your youngest child is independent, or until your spouse would reach retirement.
It is simple, and it misses things. It ignores the mortgage balance, it ignores the value of unpaid work at home such as child care, and it ignores the savings you already have. Use it as a sense check against DIME.
Remember that a lump sum can be invested by your family and drawn down over time, so the right figure is not always the full income multiplied by every year.
Method three: a needs worksheet
The most accurate method lists what your family would need and then subtracts what they would have.
Group life insurance through work is helpful but often limited, and it usually ends when the job ends. Count it, but do not let it be the whole plan.
- Immediate costs: funeral, medical bills not covered by insurance, estate costs.
- Debts you want cleared: mortgage, cars, cards, loans.
- Ongoing income: the yearly shortfall your family would face, times the number of years.
- Future goals: college, a wedding, a spouse’s retirement savings.
- Minus existing life insurance, including group coverage through work.
- Minus savings and investments your family could use.
- Minus other income they would receive, such as a spouse’s earnings or Social Security survivor benefits.
Matching the coverage to the need
Most of the need for a young family is temporary: the mortgage gets paid down and the children grow up. Term life insurance fits that kind of need at a lower cost per dollar of coverage. Some needs last for life, such as final expenses, leaving money to a spouse or a charity, or estate planning, and permanent life insurance is built for those.
Many families use both. A larger term policy covers the busy years, and a smaller permanent policy covers needs that never go away. Our guide to term versus permanent life insurance explains the trade.
Some families ladder their term coverage: for example, one policy for 30 years sized to income replacement, and another for 15 or 20 years sized to the mortgage or the years until the children finish school. As each need ends, that policy ends with it, and the total premium drops.
What changes the price
Every policy is subject to underwriting, and the final price is set by the insurer after it reviews your application.
Applying sooner rather than later usually helps on both counts, because premiums are based on your age when the policy is issued and a health change can make coverage more expensive or harder to get. Once a term policy is issued, the premium is set for the level term period you chose, and your later health does not change it.
- Your age when you apply. The younger you are, the lower the premium.
- Your health, height and weight, family history and prescriptions.
- Tobacco or nicotine use, which costs considerably more.
- The amount of coverage and the length of the term.
- Riders you add, such as living benefits or a waiver of premium.
Arizona protections worth knowing
Life insurers that sell in Arizona are licensed and regulated by the Arizona Department of Insurance and Financial Institutions. If a licensed life insurer ever became insolvent, the Arizona Life and Disability Insurance Guaranty Fund provides a safety net for Arizona residents, up to $300,000 in death benefits and up to $100,000 in cash surrender value per life, according to the Department. That is a backstop, not a reason to ignore an insurer’s financial strength, which is why we look at ratings before recommending a carrier.
A worked example for an East Valley family
Imagine a Chandler couple in their late 30s with two children, ages 4 and 7. One spouse earns $70,000; the other works part time and handles most of the child care. They have a mortgage balance of $300,000, a car loan of $15,000, and $40,000 in savings. The working spouse has group life insurance at work equal to one year’s salary.
Using the needs method for the higher earner: $15,000 car loan plus $15,000 for final expenses, $300,000 to clear the mortgage, $70,000 a year for 15 years until the youngest is about 19, and $60,000 toward education. That totals roughly $1,440,000. Subtract the $40,000 of savings and the $70,000 of group coverage, and the gap is about $1,330,000. They might round to a $1.25 million or $1.5 million term policy, depending on budget and Social Security survivor benefits.
For the part-time spouse, the need is real too: child care, help at home and lost part-time income for several years. A policy of a few hundred thousand dollars is a common starting point. All figures here are illustrations to show the method, not recommendations.
The bottom line
The right amount is the one that lets your family stay in their home and keep their plans if the worst happens. Try the life insurance needs calculator on our tools page, look at our Term Life Insurance page, then go through the numbers with Viola or Jacob. They will help you size the coverage, compare carriers and keep the premium comfortable.
Want to go through this with someone?
Viola Lucero and the Rise Up Benefits team in Chandler will go through your doctors, your prescriptions and your real numbers, and explain plainly what we found. We speak insurance, so you don't have to.
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Please note: Life, long-term care, annuity and supplemental products are subject to underwriting and carrier approval. Guarantees are based on the claims-paying ability of the issuing company. Nothing on this site is tax, legal or investment advice.