How much life insurance do you need? A simple framework
"How much life insurance do I need?" is the question that stalls most people. The honest answer: enough to replace what you contribute to your family, for as long as they would need it. Here is a framework that turns that into an actual number.
The income-replacement starting point
A common rule of thumb is 10 to 12 times your annual income. A $75,000 earner would target $750,000 to $900,000 of coverage — roughly the lump sum that draws an income like your paycheque.
It is a blunt instrument. Young families with decades of expenses ahead may need more; near-retirees with a paid-off home may need far less. Hence the next method.
The DIME method: a bottom-up calculation
Debt — Add everything you would not want to leave behind: credit cards, car loans, personal loans, lines of credit.
Income — Multiply your take-home pay by the number of years your family would need it.
Mortgage — Your remaining mortgage balance, so the family home stays secure.
Education — Estimated future costs for your children.
Add the four together, then subtract savings, existing policies, and anything your family could realistically live without. What remains is your coverage gap.
Do not rely on employer coverage alone
Group life insurance — often one or two times your salary — feels reassuring, but it has three weaknesses:
- It disappears when you change jobs
- It rarely accounts for a stay-at-home parent's contribution
- One or two years of salary seldom replaces 15
Layering policies
You do not need one giant policy. Many households layer coverage instead: a 20-year term sized to the mortgage, a 10-year term for the child-raising years, and a small policy for final expenses. As each layer expires, the need it covered has usually expired too.
Tip: Revisit your coverage after major life events — a new baby, a home purchase, a raise, or a divorce. The right number moves as your life does.
The bottom line
Start with the DIME method, sanity-check it against the income rule of thumb, and close any gap with affordable term insurance. The best amount is the one that lets your family keep their plans if you are not there.
This article is for informational purposes only and does not constitute financial advice. Rates and product details change frequently — always compare current offers before making a decision.
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