How much life insurance do I need? Here are some rules of thumb.

Life Insurance coverage is an important part of everyone’s financial plan – but not everyone needs the same life insurance coverage. Your situation, obligations, and priorities are unique to you, and the amount of life insurance you need reflects that. This article will help you better understand:

• Why you need life insurance

• General rules for determining the amount you need

• What’s the right amount of coverage for you

What is life insurance — and why you should consider it

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, known as the death benefit. Life insurance proceeds — the funds paid out as the death benefit — can be used by beneficiaries (typically your family) for almost any financial need in your absence: covering living expenses, paying off debts, even managing estate taxes. It can be reassuring to know that your loved ones will have those resources if something happens to you.

“How much life insurance do I need?” really means “How big a death benefit?”

Whichever kind of life insurance policy you get, you want 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:

• Income replacement to help your family maintain their standard of living

• Covering your mortgage or rent

• Paying off debts, including credit card debt and car loans

• Saving for college and other education expenses

Even if you’re a part-time worker or stay-at-home parent, you should consider having enough insurance to pay for things like:

• Childcare expenses

• Household duties

• Funeral costs and/or final expenses

Basically, you need 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. Of course, coverage needs vary, so it’s important to consider your specific circumstances when determining the right amount of life insurance for you.

General rules of thumb for determining how much life insurance you need

While you don’t know the future and you can’t foresee every possible expense your family might face in your absence, there are a few straightforward ways to start estimating your number:

1. Human Life Value*

Based on the value of your future earnings, a simple way to estimate this is to consider 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 this approach.

2. Multiply your income by 10 — and add college for each child

This approach is a bit simpler but still helps plan for opportunities like college tuition for your children. How much should you add for each child? College isn’t cheap: 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. Alternately, you may want to specify an additional amount if you want to leave an inheritance or make charitable donations.

3. Use the DIME formula

This method considers future expenses in addition to future earnings. DIME stands for Debt, Income, Mortgage, and Education — four significant factors to consider when making a detailed estimate of your life insurance needs:

• Debt: Total all your debts other than your mortgage. Car payments, credit cards, student loans — even personal obligations such as money you may have borrowed from a sibling to put a down payment on your house. On top of all that, add about $7,000 for final expenses.

• Income: How much do you make a year? And how many years will your family need that money? It’s a tricky question to answer, but a good place to start is determining how many years until your youngest child graduates high school. For example, if you make $50,000 and have nine years until your youngest graduates high school, put down $450,000 for income.

• Mortgage payments: Look at your last statement and get the payoff amount. If you have a second mortgage or HELOC (Home Equity Line of Credit) add that (if you haven’t already included it in the debt section above).

• Education: Anticipated college costs for each of your children. As we said before, consider planning for between $100,000 and $150,000 per child.

Add those four factors all up and that’s your number. You can also adjust (i.e., subtract) for any current savings and life insurance you already carry.

No matter which way you choose to estimate your life insurance needs, it’s important to choose a policy term that matches the length of your financial obligations — or invest in permanent coverage (see below) — so your policy lasts as long as your family needs protection.

The Human Life Value Estimation method

Some financial advisors calculate the amount you need using the Human Life Value philosophy, which is based on your lifetime income potential: what you’re earning now, and what you expect to earn in the future. In its simplest form, it suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, and current benefits.

Having said that, the amount of insurance you should purchase depends on many factors, including your unique financial situation. That’s why you should consider talking to a financial advisor who can help you assess your specific needs.

There are two basic types of life insurance – permanent (like whole life) and term.

With term life policies, you pay a specific premium for a defined term (say 10 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 (generally speaking) designed to provide lifelong coverage. Over time, a portion of your premiums can build a “cash value” to your policy.¹ That cash value 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 or own multiple policies to tailor your coverage to different needs and life stages. Laddering, or combining policies can be a cost-effective way to meet your coverage needs over time. (You can read mor about different types of life insurance or contact a Guardian Financial Advisor to learn more.)

So, how much life insurance 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 — that’s why it’s always best to take the time to talk with someone who really understands life insurance.

Who can I talk to about life insurance?

That’s easy. Just contact Guardian to find a Financial Advisor who will take the time to learn about your unique situation, listen to your concerns, and explain about 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-efficient way to get the financial protection you want for yourself and your family. Your employer may provide life insurance as a no-cost benefit, or you may opt to pay for additional life insurance through payroll deductions. Contact your HR department to review your plan details and determine how much life insurance is available to you.