How much life insurance do I need?
Life Insurance coverage is a critical source of financial protection — but not everyone needs the same life insurance coverage. The amount that’s right for you depend on your situation, obligations, and personal priorities. This article will help you better understand:
What is life insurance — and why you should consider
The basic concept is simple: Life insurance is an agreement between you and an insurance company. You agree to pay premiums, and in return, the company agrees to pay a specific amount to your beneficiaries — typically your family — when you pass away. Knowing that your loved ones will have additional resources if something happens to you could be reassuring.
“How much life insurance do I need?” really means “How big a death benefit?”
Whichever kind of life insurance policy you get, you want to consider a death benefit that’s large enough to cover the bills and expenses you won’t be able to help with if you’re gone. If you’re the primary income earner, that includes things like:
Replacing income from your job
Covering your mortgage or rent
Paying off debt, including credit cards and car loans
Even if you’re a part-time worker or stay-at-home parent, you should consider having enough insurance to pay for things like:
Household duties
Funeral costs and/or final expenses
Basically, you should consider enough to cover all the extra costs your family would have in your absence, especially while your kids are still at home. And generally, the more dependents you have — and the younger they are — the more life insurance you may need.
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How to calculate your coverage need in a few minutes
1. Total up the following: | 2. Subtract current assets |
|---|---|
Your salary, multiplied by how many years of income replacement you want for your family | Savings |
Mortgage balance | Investments |
All other debts (including car payments, student loans, credit card debt, outstanding loans) | Retirement accounts |
Higher education costs for your children (if any) | Existing college savings |
End-of-life expenses (i.e., funeral costs) | Existing life insurance policies |
This simple calculation is a variation on the DIME method (Debt, Income, Mortgage, and Education) a popular way of calculating life insurance needs. It’s a simple approach that adds up your total need and then subtracts existing assets and coverage. For a quicker estimate, try our online life insurance calculator. Or, if you have more time, you can also consider other ways to look at your needs.
Two other rules of thumb for determining how much life insurance you need
Human Life Value* | Multiply your income by 10 – and add college for each child |
|---|---|
Based on the value of your future earnings, a simple way to estimate this is to get 30X your income between the ages of 18 and 40, 20X income for age 41-50, 15X income for age 51-60, and 10X income for age 61-65. After age 65, coverage is based on net worth instead of income. See below for a more detailed explanation of the philosophy behind this method and other factors that may be considered in the calculation. | This approach is a bit simpler but still helps plan for children's education expenses. How much should you add for each child? College expenses can be considerable: You should account for somewhere between $100,000 and $150,000 per child. If you split the difference – and have two kids – that's an extra $250,000. |
Consider the type of coverage: Whole life insurance vs. term life insurance
As you consider your life insurance needs, you should also consider the different kinds of policies you can get. There are two basic types of life insurance: permanent life insurance (including whole life insurance and universal life insurance) and term life insurance. Here's how they differ.
With term life policies, you pay a specific premium for a limited term of coverage (e.g., ten years)
If you pass away during that time, a death benefit is paid to your beneficiaries – but when the term is over, you have to get new coverage or go without.
Permanent life insurance policies, like whole life policies, are designed to last for your entire life
In addition to providing a death benefit, over time, a portion of your premiums can build a “cash value” to your policy.1 That cash value component gives you options: you can use it to pay for premiums later on (for example, when you retire), take loans and withdrawals, or you can “surrender” (give up) the policy after your beneficiaries no longer need it and get money to help supplement your income.2
Generally speaking, life insurance premiums are higher with permanent coverage than term because permanent life insurance policies provide more and longer-lasting benefits. However, you don't have to choose one over the other; you can combine policy types to get the needed coverage. (You can read about different types of life insurance or contact a Guardian financial professional to learn more.)
So, how much coverage do I need?
Ultimately, the answer has more to do with your feelings than anything else: The best coverage amount is the one that gives you the most reassurance that your family will be taken care of — even if you're not around to provide that care. Remember, these general rules are just that — generalities that are not specific to you. Maybe you have other assets, such as a share in a small business. Or other obligations you're concerned about, such as how to care for aging parents. Those specifics can get complicated pretty quickly — and in such cases, it's best to take the time to talk with a professional who really understands life insurance.
When is the best time to buy life insurance?
The best time to buy life insurance will depend on your personal circumstances and needs, but here are some key things to think about:
Your age: Generally, the younger you are, the lower the premiums. This is because insurers typically view younger people as lower risk.
Your health: Being in good health can also result in lower premiums. If you're in good health or have any existing health conditions that may become more serious over time, it's usually better to purchase life insurance sooner rather than later.
Your financial responsibilities: If you have dependents who rely on your income or significant financial obligations such as a mortgage, it can be important to have life insurance in place in case of your death. Again, sooner is better than later.
Your life stage: Major life events such as marriage, buying a home, or having children often prompt people to consider life insurance. Why? These events usually increase financial responsibilities and the need to protect loved ones financially.
Are there alternatives to life insurance?
There are alternatives to having a life insurance policy, but they usually don’t provide the level of financial protection provided by a robust whole or term policy. Whether one is appropriate for you depends on your needs, circumstances and risk tolerance. They include:
Self-insurance: Rather than purchasing life insurance, some individuals choose to "self-insure" by accumulating enough savings and investments to cover their family's financial needs in case of death.
Emergency fund: Building up an emergency fund can help provide a financial cushion for your loved ones in case of your death. At the very least, it should be enough to cover end-of-life expenses and other immediate needs.
Annuities: Annuities are financial products offered by insurance companies that provide a stream of income payments over a specified period. Many annuities offer a death benefit that can provide a lump-sum payment to beneficiaries.
Accidental Death and Dismemberment (AD&D) insurance provides a benefit if you die or suffer a serious injury in an accident. AD&D policies usually have lower premiums than traditional life insurance but — as the name implies — only provide coverage for deaths caused by accidents, as opposed to deaths from natural causes or illness, which are far more common.
Who can I talk to about life insurance?
That’s easy. Just contact Guardian to find a financial professional who will take the time to learn about your unique situation, listen to your concerns, and patiently explain the different insurance options that best fit your needs and your budget. It’s what Guardian has been doing to help protect families for more than 160 years.
If you are an employee, taking advantage of your benefits at work can be a smart and cost-effective way to get the financial protection you want for yourself and your family. Contact your HR department to review your plan details and determine how much life insurance is available to you. Your employer may provide life insurance as a benefit, or you may opt to pay for additional life insurance through payroll deductions.
Frequently asked questions about how much life insurance you need
The life insurance coverage you get should be enough to make you feel comfortable that your family will have the financial support they need if you're unable to provide for them. You can talk to a financial professional who will consider your age, income, family situation, financial obligations, and other factors to calculate a detailed estimate of that amount. Or, try using an online life insurance calculator or one of several rules of thumb.
If you're buying life insurance, consider getting up to 30X your income between the ages of 18 and 40, 20X your income at age 41-50, 15X your income at age 51-60, and 10X your income at age 61-65.
According to the American Council of Life Insurers, the average size of a new individual life insurance policy purchased in 2020 (the last year of data available) was $184,000.
A common rule of thumb is at least 6% of your gross income plus 1% for each dependent.
A stay-at-home parent should consider getting enough life insurance to cover the costs incurred by the family if anything should happen to them. For example, the surviving parent may have to hire someone to care for the home or watch any children.
There’s reason to believe women may need more life insurance than men, not less. Women earn more than ever before, and 70% of U.S. moms expect to be the primary breadwinners for their families before their children turn 18.3 On average, women live 6-8 years longer than men, yet they typically buy less life insurance coverage and save less for retirement than their male counterparts. 4
Guardian has a minimum of $100,000 for a term life policy. Whether this will be enough to protect your family, your dependents, or other beneficiaries depends on their anticipated needs, their existing assets and several other factors.