How much life insurance coverage do I need?

Tom Griffiths

Mar 11, 2021

•  4 min read

1.

Life Insurance Calculator

2.

10 - 15x Your Income

3.

The DIME Method

4.

Final Thoughts

Tom Griffiths

Mar 11, 2021

•  4 min read

TL;DR: When deciding how much life insurance you need, a general rule of thumb that many financial experts use is getting coverage that is 10 - 15x your pre-tax income.

This enables the lump sum to cover any outstanding mortgage, debt, children's education, and replace your income for living expenses.

Life Insurance Calculator

Our life insurance calculator takes into account your income, family situation, existing assets, and your debts to help you decide the amount of coverage you should get.

Your final coverage amount is ultimately up to you, but this calculator should help guide that decision.

Life insurance calculator. See how much life insurance coverage that you need.

If you would like to brush up on your life insurance knowledge read our article Life insurance 101: The ultimate guide to life insurance.

10 - 15x Your Income

One of the easiest and quickest ways to calculate how much life insurance you need is to multiply your before tax annual income by 10-15.

If you have a sizable mortgage, large amount of debt, kids to put through college, etc., you may want to be closer to 15 times your income.

This ensures the lump sum covers the larger expenses and also provides a steady stream of income for those who depend on you financially. If you have a large portfolio of assets, do not require funds for college, and have low debt, you could choose a smaller amount of coverage at 10x your income.

Lets run through a scenario to see how it might play out:

Matt is married, has two children, and earns $50,000 a year. He has $200,000 remaining on his mortgage and owes $15,000 in medical bills.

He decides to take out a life insurance policy that is 15x his income. That gives his family a $750,000 lump sum.
Cash flow$ amount
Lump sum+$750,000
Pay off mortgage-$200,000
Fund college-$100,000
Pay off debt-$20,000
Remainder to invest$430,000

The table above is an example of how an individual may choose to use a lump sum death benefit.

There’s no right or wrong way to use the lump sum death benefit, it’s up to each individual family. However, it’s helpful to have a plan beforehand if possible.

In this scenario, the family uses some of the lump sum to pay off the mortgage, medical expenses, and add to a college fund for their children. Additionally, are able to cover the costs of the funeral using the amount they received from his life insurance policy.

If in doubt, find a good financial advisor to help you manage your money wisely.

As you can see in the table above, now his family would have $430,000 to invest.

The goal could be to live off the interested generated from this investment – essentially never touching the $430,000 itself. If this investment earned an average of 8% a year, that would give the family $34,400 a year in income.

Given that all debts and the mortgage have been removed, this income would be enough to maintain their family’s quality of life from a financial perspective — removing any monetary stress or worries. That’s a lasting legacy.

Not having life insurance in place can be devastating. Imagine the scenario above with no life insurance. You have a family grieving the loss of a spouse and parent.

Combined with the added financial stress of, “how are we going to pay for the funeral?”, “how are we going to pay the house and bills this month?”.

This is the reason why life insurance is one of the most important pieces of your personal finance plan. It defends what you work hard for every day, your family’s future wellbeing.

The DIME Method

DIME is an acronym that stands for debt, income, mortgage, and education. These four components make up a huge part of our financial lives, which is why this is a popular method for calculating life insurance needs.

  • Debt and final expenses – Total up all non-mortgage debt and final expenses (the average cost of a funeral is $7,000).
  • Income – Decide how many years of your dependents will need your income and multiply your annual income by that. If you’re a stay-at-home parent, we always recommend that you put the cost of a full-time nanny in your area – the average cost of a full-time Nanny in the U.S is $40k.
  • Mortgage – Calculate your outstanding mortgage debt that you would pay off.
  • Education – Estimate how much it will cost to send your kids to school and college. The average cost of a public 4-year in-state school is currently $21,950 per year. Source: educationaldata.org

You add all the four numbers together, and that’s the estimated coverage amount. The DIME formula takes into account your financial situation, whereas 10-15x your income does not.

Although the DIME method does not take into account your current savings and assets, if you’re further along your financial journey have built a good nest egg (retirement accounts, non-retirement investments) it may overestimate your needs.

Final Thoughts

The 10-15x method and the DIME method are helpful for calculating your ideal life insurance coverage.

The actual coverage amount that you choose depends on what you’re comfortable paying in monthly or annual payments, as well as what you intend to use that money for.

You should never let a calculator, financial advisor, or insurance agent tell you what you need. This information is available to guide you to a decision that’s best for you.

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Tom Griffiths

Tom is the Founder of Bello and life insurance expert. He built Bello to make life insurance simple to understand and even easier to get.

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