How much life insurance do you need?
Life insurance should replace the financial support you provide and pay off the costs your family would face without you. The DIME method used here adds up four needs:
- Debt and final expenses: credit cards, car loans, personal loans and funeral costs.
- Income: your yearly income times the number of years your family would need it.
- Mortgage: the balance left on your home loan.
- Education: the expected cost of college for each child.
Then it subtracts the savings and life insurance you already have, such as a policy through your employer.
Term vs. whole life insurance
Term life covers you for a set period, often 10, 20 or 30 years, and is usually the most affordable way to buy a large amount of coverage. Whole life and other permanent policies last your whole life and build cash value, but cost much more for the same death benefit. Many families choose a term long enough to cover the years until the kids are independent and the mortgage is paid.
The 10× income rule
A quick rule of thumb is to buy coverage worth 10 to 15 times your annual income. It is easy to remember, but it ignores your debts, savings and children's needs, which is why a needs-based estimate like the one above is more accurate.
What affects the cost of life insurance?
Premiums depend mainly on your age, health, tobacco use, coverage amount and term length. Buying younger and healthier locks in lower rates. Compare quotes from several insurers, since prices for the same coverage can differ a lot.
Frequently asked questions
Do stay-at-home parents need life insurance?
Yes. Replacing childcare, housekeeping and other work a stay-at-home parent does can cost a family tens of thousands of dollars a year.
Is employer life insurance enough?
Group coverage is often only one or two times your salary and usually ends when you leave the job. Most families need an individual policy as well.
How long should my term be?
Choose a term that lasts until your youngest child is independent and your major debts, like the mortgage, are paid off. For many young families, that is 20 to 30 years.
Are life insurance payouts taxed?
In the US, death benefits paid to a beneficiary are generally not subject to federal income tax, though there are exceptions. Check with a tax professional for your situation.
This is an educational estimate, not a quote or insurance advice. Talk with a licensed agent before buying a policy.