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

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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:

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What is life insurance – and why you need 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 to your beneficiaries – typically your family – when you pass away. It could be reassuring to know that your loved ones will have additional 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:

  • Replacing income from your job
  • Covering your mortgage or rent
  • Paying off debt, including credit cards and car loans
  • Saving for college

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

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.

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 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.

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.

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, figure 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.

The Human Life Value Estimation method

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

As with every individual, the amount of recommended insurance you purchase depends on many factors. That’s why it’s a good idea to talk to a Financial Representative when buying life insurance.

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 last for your entire life. 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

We won't go into variations now, but 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 coverage amount you need. (You can read about different types of life insurance or contact a Guardian Financial Representative 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 Representative 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 affordable 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

How do you determine how much life insurance you need?

The amount of 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 not alive to provide for them. You can talk to a financial representative who will consider your age, income, family situation, financial obligations, and other factors to calculate a detailed estimate of that amount. You can also use this term life insurance calculator to estimate your need and get a quote, or use a rough estimation method based on your expected earnings.

What is the rule of thumb on how much life insurance coverage you need?

Consider getting up to 30X your income between the ages of 18 and 40; 20X income at age 41-50; 15X income at age 51-60; and 10X income for age 61-65.

How much life insurance does the average person have?

According to the American Council of Life Insurers, the average size of new individual life insurance policies purchased in 2019 was $178,150 in 2019.

What percentage of your income should you spend on life insurance? 

A common rule of thumb is at least 6% of your gross income plus 1% for each dependent.

How much life insurance should a stay-at-home parent get? 

A stay-at-home parent should get 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.

What are the benefits of life insurance for women? 

There’s reason to believe women may need more life insurance than men, not less. Women earn more than ever before, and 41% of mothers are the sole or primary breadwinners for their families.3 And on average, women live 6-8 years longer than men4, yet they typically buy less life insurance coverage and save less for retirement than their male counterparts.

What is the lowest amount of insurance you can buy? 

Guardian has a minimum of $100,000 for a term life policy.

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Disclaimer

1 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

2 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

3 “Female Life Expectancy,” World Health Organization https://www.who.int/gho/women_and_health/mortality/situation_trends_life_expectancy/en/ October 2019

4 “The Gender Earnings Gap and Retirement” Forbes https://www.forbes.com/sites/margueritacheng/2018/07/12/the-gender-earnings-gap-and-retirement/#1c8ee6317714 July, 2018

*The HLV Theory states that one should maintain life insurance equal to the present value of their expected future earnings. Life insurance companies place limits on life insurance available to consumers based upon this formula and have created age-based multiples of current income as a guideline. For example, a person in their 30s may be insured for around 30 times their annual income, 20 times for a person in their 40s and 10 times for people in their 50s. Age 60 and over about 1 times net worth.

This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

2022-136310 20240430