How much life insurance do I need? The full method

"How much life insurance do I need" is the most-asked question in the category, and most answers are either a rule of thumb or a sales pitch. This is the full method, with the reasoning behind each number, so you can size your own coverage and defend the figure to your partner. Our estimator does the arithmetic; this page explains it.

The question the number is answering

Life insurance replaces what your household loses financially if you die: your income, the unpaid work you do, and the obligations that fall to whoever is left. It is not an inheritance, a windfall, or a savings plan. Every line below is one piece of that loss, priced.

Line one: income, times years

Take your annual contribution to the household. For an earner, that's your take-home pay; for a parent who stays home, it's the cost of replacing what you do (full-time childcare plus household help in your area is a fair proxy). Multiply by the number of years someone would depend on it. That's usually until the youngest child is independent, though some people extend it to a surviving spouse's retirement age. For a newborn, 20 to 25 years; for a ten-year-old, 10 to 15.

This line is almost always the largest, and it's where people underestimate. Twenty years of an $80,000 income is $1.6 million. That isn't excess; it's a paycheck arriving on schedule for two decades.

Line two: debts

The remaining mortgage balance, then car loans, student loans, credit cards, and any personal loans. Include debts in your name and joint debts; leave out debts solely in your partner's name. If your partner would sell the house rather than keep it, you can reduce the mortgage line, but most survivors want the option to stay, and the policy should give it to them.

Line three: education

What you'd want available for each child's education. It doesn't have to be a private university; it's the amount that keeps the option open. $50,000 to $100,000 per child is a common range. Skip this line if it doesn't apply to you.

Line four: final expenses

Funeral and settlement costs, typically $10,000 to $20,000. Small next to the others, but it's real money at the worst time. Many people simply round the total up to cover it.

Subtract what you already have

Life insurance through work (usually one to two times salary, and it ends with the job, so count it but don't lean on it). Existing individual policies. Savings you'd be willing to see spent on living expenses; most people count emergency funds and taxable savings, not retirement accounts. If your partner has substantial income, you've already accounted for that by keeping the years-of-income line short rather than a full career.

Worked examples

New parents, two incomes. Each earns $85,000, newborn, $400,000 mortgage, $50,000 saved for education, each has $100,000 through work. For each parent: $85,000 × 20 = $1.7 million, plus $400,000, plus $50,000, plus $15,000, minus $100,000 = about $2.05 million. Round to $2 million each. Our new-parent guide works through this case in detail.

One earner, one at-home parent. Earner makes $120,000; the at-home parent's replacement cost is about $45,000 a year; two children under five; $500,000 mortgage. Earner: $120,000 × 20 + $500,000 + $100,000 + $15,000 − $150,000 at work = about $2.9 million. At-home parent: $45,000 × 15 + $0 (mortgage counted once) + $0 + $15,000 = about $700,000. Two policies, two very different numbers, and neither is zero. See life insurance for a stay-at-home parent.

Homeowner, children in their teens. Income $95,000, youngest is 15, $250,000 left on the mortgage. $95,000 × 8 + $250,000 + $40,000 + $15,000 − $100,000 = about $965,000. Round to $1 million, and a 10- or 15-year term is enough.

Single, no dependents. Income irrelevant; no one depends on it. Debts co-signed by a parent: $30,000. Final expenses: $15,000. Total: under $50,000, which employer coverage may already handle. Our guide for single people covers when the answer is still yes.

Age 55, spouse, house nearly paid. Income $110,000, retirement in 10 years, $80,000 on the mortgage, savings of $300,000 you'd count. $110,000 × 10 + $80,000 + $0 + $15,000 − $300,000 = about $895,000. A 10-year term at $900,000, or laddered. See buying term life in your fifties.

Two mistakes to avoid

Insuring only the higher earner. If the other parent died, the survivor would face childcare and household costs while trying to keep working; that cost is what the second policy replaces. And buying a round number because it "sounds like enough." $500,000 sounds substantial until you divide it by twenty years of a paycheck.

Choosing the term

Match the term to the longest dependency you counted in line one. When it's close, longer is the safer error, because you can cancel a term policy any time but can't easily extend one. The full reasoning is in 10, 20, or 30 years.

What to do with the number

Run it through the estimator, which rounds it and suggests a term. Then the application shows you the price for that amount and term before you commit, and you can adjust up or down on the spot. If the price for the full amount is more than fits, shorten the term or split into two policies before cutting the amount below what does the job. And revisit the number at every life change.