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How Much Life Insurance Do I Need?

Table of Contents

Life Insurance Calculator
Different Ways to Calculate How Much Life Insurance You Need
How Do I Know the Correct Life Insurance Policy Amount for Me?
How Much Does Life Insurance Cost?
Term vs. Whole Life Insurance Calculator
How Long Should I Make the Term for Life Insurance?
When Is the Best Time to Get Life Insurance?

So, you know you need to get life insurance because you’re a responsible adult with a bunch of lovely people depending on you (like your wonderful spouse and the bundle of joy who politely asks for a drink at 2:57 a.m.). But now you’re thinking, Well, how much life insurance do I need?

The short answer: a policy worth 10–12 times your annual income.

Now for the slightly longer answer you probably came here for: There are a few more details that affect the final number. And I promise you this: Figuring out how much life insurance you need is way more straightforward than knowing how much to tip at a counter when they spin that little iPad around. (What exactly am I even tipping you for?)

 

 

Life Insurance Calculator

To avoid you having to burn precious brain calories, use our term life insurance calculator below to estimate how much you’ll need.

 

How much term life insurance do you need?

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So, like I mentioned, the main takeaway is that you need coverage that’s equal to 10–12 times your annual income. And make it a level term life policy that lasts for 15–20 years. More on that specific time frame in a bit.

Paper and Pencil

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The point of this coverage is to replace your income if something takes you out before you’ve had enough time to become self-insured. If you’re thinking, But wait, this thing just said I need half a million dollars of coverage! I can’t afford that! Put the paper bag down and just breathe—term life insurance is surprisingly affordable.

 

How to Calculate How Much Life Insurance You Need Manually, Step-by-Step

I love that calculator of ours. But maybe you’re a mathlete who really wants to walk step-by-step through the “How much life insurance do I need?” numbers. Well, here’s some quick back-of-the-napkin math. (Trust me, this will not involve the quadratic equation.)

Let’s pretend we have a friend named Alex, a teacher in his 30s who’s shopping for life insurance. Here are his steps.

  1. At the top of his napkin (he’s just finished up brunch), Alex writes down “10–12 Times My Annual Income” since that’s the rule of thumb.
  2. Next comes his salary before taxes, so he jots down “$40,000 a Year.”
  3. Alex and his dear wife, Sarah, have two adorable kids, so he sketches in some stick figures of the family as a reminder of how many people he’s looking to cover.
  4. Starting with that lower number in the “10–12 times” rule, Alex writes down $40,000 x 10, and sees he’ll need (at minimum) a $400,000 policy. Man, this napkin’s getting pretty full! One more number . . .
  5. What about Sarah? Well she’s a stay-at-home mom, which is a synonym for low-key superhero. With all she handles, she brings a lot to the table—and just because there’s no paycheck involved does not mean she doesn’t need life insurance. What if something were to happen to Sarah? Listing it all off—from coaching to chauffeuring and, of course, kid-wrangling—Alex can see why his wife will need her own policy. He’d have to pay at least $25,000–40,000 in yearly expenses to cover things like childcare, education and household duties. So she’ll need a term life policy worth somewhere between $250,000–400,000.

That’s that! All things considered, Alex circles a big “$650,000–800,000” at the bottom of the napkin—that’s about how much this dream couple should have in mind for two term life policies if they follow the 10–12-times rule.

Why 10–12 times? Because if you die, your family can invest the payout from your life insurance in good growth stock mutual funds with an average, long-term return of 10–12%. The growth of that investment alone could replace your salary for a long time. That gives your family a comfortable financial cushion while they grieve and recover from their loss. Buying 10–12 times your salary in life insurance coverage guarantees that whatever else your family feels, they won’t feel a huge financial pinch when you’re gone.

 

Different Ways to Calculate How Much Life Insurance You Need

 

Here's A Tip

The Ramsey Way Recommendation

  • We always teach anyone shopping for term life insurance to buy 10–12 times their annual income before taxes.
  • The reason for the multiplier is simple: If the worst happens, that size of payoff will give your family plenty of resources—and time—to regroup while they recover from your loss. And they can invest it as a way to replace your salary for years.
  • Most families should buy for a term of 15 or 20 years, but the length can vary to fit your family’s age and size.
  • Be sure to get policies for both parents, including those who stay at home.

 

Of course, you’re going to find a whole lot of opinions about this out there if you Google “How much life insurance do I need?”—and most of it is worthless. (I already told you the smartest and safest way to calculate how much life insurance you should have.)

But just so you have all the info, I’ll talk you through a couple alternative methods (and why they’re wrong).

Ten times your income, plus $100,000 per child for college costs

The problem here should be obvious. You take something that works great as-is like the ten-times-your-income rule, and you ruin it with unrelated bells and whistles.

I mean, sure, your death benefit can be used to cover college costs. But there are smarter ways to pay for tuition than through a life insurance policy that you might not (hopefully won’t) even use by the time you have a kid heading for college. Both Education Savings Accounts and 529s are investment vehicles with tax advantages designed to help build college savings—term life is none of those things. So take whatever else the term life policy would have charged you for that extra $100,000 in coverage and invest it into one of these college savings accounts instead.

 

The DIME Formula

This is a more detailed (and supposedly more accurate) way to pinpoint how much coverage to buy than our tried-and-true recommendation to get 10–12 times your income in coverage. But ultimately, the DIME people are overhyping their method.

DIME stands for:

With the DIME formula, you add up all of those factors to get an idea of how much coverage to buy. (For the income part, you’re supposed to multiply your salary by the number of years you’d like to replace it, just like with the correct method.)

ThisDIME formula is way overthinking life insurance. Most of those expenses are either already covered by the Ramsey way, or they can be paid for in smarter ways through other savings and investments, plus commonsense debt elimination. (ICYMI, you need to be hustling out of debt as soon as possible. And you can do it with the Ramsey Baby Steps.)

As you can probably tell, these alternatives are just flashy ways of hyping up what we already taught you above about the 10–12x rule. Keep it simple and save on your insurance costs.

 

How Do I Know the Correct Life Insurance Policy Amount for Me?

Now here’s a little nuance for you. I keep saying that since the 10–12-times-your-income rule isn’t broken, you shouldn’t try to fix it with all sorts of extra padding.

But you can see the rule has some wiggle room. And you might be wondering, How do I know if I should go for 10x, 12x, or even 11x? Get ready for the nuance.

Since everyone’s unique, here are some questions to answer as you (and your spouse, if you’re married) decide if you’re going to go low or high on this purchase.

  • How many dependents do you have? Those bundles of love are expensive.
  • How high are your living expenses? Hey Mr. and Mrs. Frugal. I love the way you live! You can probably get by with a 10x policy. And if you’re living large? That’s your cue to go for the 12x end of the spectrum.
  • What’s your marital status? Both spouses in married couples need term life. But if you’re single as a pringle and ready to mingle, that doesn’t mean you’re off the hook. You may want insurance to pay for your funeral (especially if you’re planning on getting a “fantasy” coffin shaped like a shoe—look it up, it’s a thing). Also, the younger you are when you get the policy, the cheaper it’ll be. If you think you’ll likely get married within the next five years and start a family, it could save you some cash to get a 20-year policy now. But being single also doesn’t mean you’re on the hook. If you love the bachelor lifestyle (aka your camping chair counts as “furniture”) and plan on keeping it that way for a long time, this is an area you could save money on, either by opting out or leaning toward 10x.
  • How much debt do you have? A lot of people feel like they should wait until they’re debt-free to buy insurance, but this would be a giant mistake. When you owe other people money, that’s when you’re most vulnerable. Think about it, if you died and left your family with nothing to live on and a mountain of debt, how would they get by? But if you had a term life insurance policy for, say, $500,000, they wouldn’t have to worry about how they’re going to live without you and might even be able to pay off some or all of the debt. That’s a way better plan.
  • How close are you to becoming self-insured? If you get to a point where you’re self-insured (which means you’re debt-free and earning enough from investments to replace your annual income), you can drop life insurance completely and invest those premiums for even faster savings growth. I highly recommend it!

 

How Much Does Life Insurance Cost?

Now that you know how much term coverage you need, I know what you’re thinking: How much is life insurance going to run me? The costs to get a life insurance policy depend on a few factors, including your age, health and habits. Plug those in below to calculate your life insurance premium.

 

How much does term life insurance cost?

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See? Not so bad. If you’re wondering how to fit this premium payment into your budget, check out the free EveryDollar budgeting app where you can plan it all out down to the penny.

Hey, but that was just for term life—what about whole life? I’m glad you asked. There’s an important distinction between the two and it makes a big difference in how much you pay—and what you get for it.

 

Monthly Cost by Age

Term Life Whole Life Savings
$12.18 $142.12 $129.94
Term Life $12.18
Whole Life $142.12
Savings $129.94
Rates displayed are based on a $250,000 policy for non-smokers in the Preferred Plus health classification; term life quotes are from Legal & General (20-year term length) and whole life quotes are from Transamerica. Individual rates will vary based on applicant-specific information.

 

Just like choosing a kind of drink at your favorite coffeeshop, the kind of life insurance you get affects the price. And just like coffee, the cheaper version of life insurance is actually better (drip coffee, black!). If you choose term life insurance (please do) it won’t cost nearly as much as some other bad options—like paying triple for that frappamacchialatte (which we all know isn’t coffee—it’s just a milkshake for adults).

While we’re on the subject, let me explain why whole life insurance costs more. It’s because whole life policies try to combine investing with life insurance. So you’re paying for both. But just like you’d expect ice cream from a business that also does dog grooming to be pretty crappy, the investments in a whole life policy are really crappy. And the dog-hair-covered cherry on top? Tons of fees.

 

How Long Should I Make the Term for Life Insurance?

Term life insurance policies come in different terms—of 10, 15 and 20 years. Likely, you’ll want a policy for 15–20 years. That’s long enough to give the kids time to grow up and (fingers crossed) get out on their own (meaning they’re no longer dependent, they’re independent!). It also allows you and your spouse time to build enough wealth to self-insure.

It sounds like a lot. But like I mentioned earlier, that much term life insurance is actually pretty inexpensive for most people. Plus, you’re not just looking to take care of your family’s immediate needs—you want to make sure their future needs are covered too.

 

Get Term Life Insurance Rates From Zander Today!

RamseyTrusted partner Zander Insurance will get you rates from top life insurance companies and pair you with the one that fits you best.

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When Is the Best Time to Get Life Insurance?

Bottom line: If you have dependents, now is the best time to get life insurance. Don’t leave them unprotected. If you have young kids, they’re counting on you for the next 15–20 years. Whether your spouse works or not, they’re also counting on your income, so don’t run the risk of leaving them high and dry.

I recommend a term life insurance plan worth 10–12 times your income because I believe it makes the most sense for everyone. It does exactly what it’s supposed to do (replace your income for your loved ones) and nothing more.

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George Kamel

About the author

George Kamel

George Kamel is a personal finance expert, certified financial coach through Ramsey Financial Coach Master Training, and nationally syndicated columnist. George has served at Ramsey Solutions since 2013, where he speaks, writes and teaches on personal finance, investing, budgeting, insurance and how to avoid consumer traps. He co-hosts The Ramsey Show, the second-largest talk show in the nation. He also hosts The EntreLeadership Podcast and The Fine Print podcast, which has over one million downloads. You can find George’s financial expertise featured in the U.S. Sun, Daily Mail and NewsNation. Learn More.

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