How much life insurance do I need?

Standard-of-living costs and your financial legacy will dictate how much you need

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Depending on the company and the type of policy, life insurance can last either for a specific period of time or for as long as you live (provided premium payments are kept current).

Coverage amounts can range from as little as $5,000 for a basic burial insurance policy (to cover final expenses like medical bills and funeral or cremation services) to $1 million or more for a term life policy.

Whole life insurance policies of up to $10 million, which provide income for the policyholder and a financial legacy for the beneficiaries, are also available.


Key insights

Consider buying life insurance if you need to pay for any final expenses or have any dependents.

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The standard-of-life and DIME methods or multiplying by 10 are all common ways to calculate how much life insurance you need.

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Life insurance premiums are cheapest on average when you’re young, regardless of policy type.

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When should you consider getting life insurance?

Buying life insurance is a highly personal decision because every person’s needs and finances are different. But experts say it doesn’t pay to wait.

“The younger you are, the lower your rates will be,” said Randy VanderVaate, a licensed insurance agency owner based in Dallas. “Waiting can significantly increase your insurance rates. Getting a policy now guarantees your current health rating and avoids potential future health changes that would make coverage more expensive or difficult to get.”

According to the Insurance Information Institute, you may want to consider buying a life insurance policy if you’re looking to:

  • Leave a financial legacy to a friend or family member or to an institution or organization.
  • Pay for any final expenses, such as burial and funeral costs, outstanding bills or taxes, etc.
  • Supplement other savings and investments intended for your heirs and survivors.

“Buying life insurance protects your loved ones financially if you die unexpectedly,” said VanderVaate. “This is especially critical for people with family members who rely on your income or if you have outstanding debts that your surviving loved ones would be forced to pay after your death.”

However, buying life insurance isn’t required by law the way car insurance is, and not everyone needs coverage. Talk to an insurance agent or broker to discuss your life insurance needs.

» COMPARE: Best life insurance companies

How much life insurance do you need?

How much life insurance you need will depend on your reasons for buying coverage and — just as importantly — how much you can afford. Think about why you want to buy a life insurance policy and what your goals are.

Here are some common scenarios:

  • To replace lost income that your family depends on
  • To provide for dependents, such as for college expenses, long-term care or daily needs
  • To bequeath a financial gift to an individual, institution or charity
  • To cover end-of-life expenses, such as funeral, cremation and burial costs or medical or legal bills

» MORE: Types of life insurance

How to calculate how much life insurance you need

There are three common ways to calculate your life insurance needs: the standard-of-living method, the DIME method and multiplying by 10.

If you don’t want to do the math yourself, most insurers offer free life insurance calculators online.

Standard-of-living method

This is the most detailed way to calculate your life insurance needs.

First, estimate your annual income and how many years your dependents would need to rely on it. If you have other sources of income, such as investments or rental property, add that in as well.

You’ll also need to factor in “standard-of-living” costs that your heirs would face if you were to die, such as home maintenance you would no longer be around to take care of, and other potential expenses, like your partner needing to move to another city or retrain for a new career in your absence.

End-of-life expenses such as funeral costs and related medical or legal fees should also be accounted for.

Finally, don’t forget any additional financial legacy you want to ensure goes to your beneficiaries.

DIME method

The DIME (Debt, Income, Mortgage, Education) method estimates life insurance needs based on these four factors. Calculate:

  • Your outstanding debts
  • Your annual income times the number of years your dependents would be relying on it
  • How much you still owe on your mortgage (if anything)
  • Any future education expenses for your dependents

The total is the base amount of life insurance coverage you need.

Multiply your income

This may be the easiest means of estimating your life insurance needs: Simply multiply your annual income by 10.

On the other hand, this is also the least precise means of calculation and doesn’t allow for important factors such as how much savings and debt you have or major expenses.

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FAQ

What happens to my life insurance if I lose my job?

Many companies will offer their workers a low- or no-cost life insurance policy as part of their employee benefits package. These benefits typically expire when you leave your place of employment, regardless of whether you depart voluntarily or involuntarily.

In some cases, you may be able to maintain coverage by paying the insurer directly. However, you may find the premium prohibitively expensive and be able to find a life insurance policy elsewhere for less.

How much life insurance do I need at age 60?

That depends on your financial needs and goals. For example, if you have a few years left on your mortgage or student loan payments and don’t want to risk burdening your heirs with that debt, a term life insurance policy could be a good idea.

If, on the other hand, you would prefer to leave a financial legacy for your family, or want to ensure a dependant with long-term care needs is cared for, a permanent life insurance policy may be a better choice.

Finally, if you only want to make sure there is cash for end-of-life costs, such as for a funeral or medical bills, a final expense or burial insurance policy may be all you need.

What are the three types of life insurance?

The three types of life insurance are term, whole and universal.

  • Term life insurance is temporary. The death benefit is guaranteed, but only if the insured person dies while the policy term is active. After the term expires, coverage ceases.
  • Whole life insurance is permanent and contains a savings component that grows cash value over time. The policyholder can withdraw the cash, but doing so will diminish the death benefit unless those funds are repaid.
  • Universal life insurance is permanent but offers more flexibility. Premiums are adjustable; you can pay less over time if your finances change, but doing so may diminish the death benefit. Some universal life policies allow you to invest the cash value in stock or bond funds.

Bottom line

How much life insurance you need is a personal decision based on factors like whether you have any dependents and if you have expenses to be covered after your death. You can calculate the right amount for you by using the standard-of-life or DIME methods, or multiply your annual income by 10 for a simpler calculation.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Guardian, “What is life insurance, and how does it work?” Accessed March 21, 2024.
  2. Bestow, “Understanding Life Insurance Premiums and How They Work.” Accessed March 21, 2024.
  3. Progressive, “What is burial insurance?” Accessed March 21, 2024.
  4. Insurance Information Institute, “What is burial insurance?” Accessed March 21, 2024.
  5. Fidelity Life, “Cost of one million dollar life insurance policy.” Accessed March 21, 2024.
  6. USAA, “What is permanent life insurance?”  Accessed March 21, 2024.
  7. Insurance Information Institute, “8 smart steps for buying life insurance.” Accessed March 21, 2024.
  8. Insurance Information Institute, “How much life insurance do I need?” Accessed March 21, 2024.
  9. Progressive, “Life insurance calculator: How much coverage should you have?” Accessed March 21, 2024.
  10. Kiplinger, “Are You Too Young for Life Insurance?” Accessed March 21, 2024.
  11. Progressive, “What happens to life insurance when you leave a job?” Accessed March 21, 2024.
  12. Northwestern Mutual, “What Happens to Your Benefits When You Leave Your Job.” Accessed March 21, 2024.
  13. Kiplinger, “Why You Might Still Need Life Insurance in Your 50s and 60s.” Accessed March 21, 2024.
  14. Fidelity Life, “A guide to life insurance for seniors over 60.” Accessed March 21, 2024.
  15. Insurance Information Institute, “What are the principal types of life insurance?” Accessed March 21, 2024.
  16. New York Life, “Whole life vs. universal life insurance.” Accessed March 21, 2024.
  17. John Hancock, “Life insurance: what's your number?” Accessed March 21, 2024.
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