Close this search box.

How Much Life Insurance Should You Carry?

The two most common questions most people ask when looking into life insurance options are: How much do I need? And which type of life insurance should I choose?

As with other key financial decisions that families need to make, the answers to these questions aren’t always straightforward. For example, some families could require permanent life insurance, while others many benefit more from cheaper term life insurance that also offers a larger death benefit.

Likewise, the amount of coverage necessary differs from person to person. Often, this is based in factors like how much you earn, your career stage, and the debt obligations you have. So, to find out whether life insurance will work for you, you must determine how much it will cost and what you can expect to receive from it before purchasing a policy.

What Does Life Insurance Cover?

A life insurance policy provides a death benefit, which is paid to the beneficiaries as a cash payout when the policy owner dies. Benefits from life insurance policies can be used to cover the following:

  • Replacing the insured’s income if they’re no longer able to work. According to the Bureau of Labor Statistics, the the average earnings for U.S. workers is $51,480.
  • Final expenses like casket, cemetery plot, funeral director, or cremation services. Funeral costs in the U.S. average $7,640 when you include a viewing and burial. When you include a vault, funeral costs can soar past $9,000. Most funeral homes can provide cremation services on site, however, which lowers the average cost to $350. 
  • Debts such as mortgages, auto loans, and student loans. A typical American owes $90,460, which covers consumer debt ranging from credit cards to personal loans and mortgages to student loans.
  • Education expenses and extracurricular activities for the children. It costs about $88,000 to send a child to college. When you multiply the College Board’s estimate of four-year public university tuition, fees, room, and board by one year, you’ll get a substantial number.
  • Childcare or household assistance costs. A middle-class couple raising a child through the age of 17 may expect to spend $233,610 ($284,570 if inflation is accounted for) on food, shelter, and other necessities.
  • Other basic living costs such as utility bills, groceries, etc. While this varies on factors like where you live and the size of your household, the average American’s monthly expenses are $5,102.

Essentially, life insurance provides your dependents with financial support if you are suddenly unable to provide for them. As a result of this, your beneficiaries can use these money for whatever they need, such as monthly living expenses or milestone costs like college tuition.

How Much Does Life Insurance Cost?

There are a number of factors that can affect the life insurance price dramatically. Among them are:

  • Age
  • The overall state of your health
  • A family’s medical history
  • Job description
  • Hobbies
  • Gender
  • Your state of residence
  • Coverage amount
  • The type of life insurance you purchased

The most affordable life insurance is typically a term life policy. Term policies, unlike permanent policies, offer coverage for a limited period of time, usually 10 to 30 years from the date of purchase. In fact, it’s estimated that the cost of a 10-year, $250,000 life insurance policy ranges between $15 and $17 per month for a 40-year-old in good health.

There is, however, a steep hike in permanent life insurance prices from there. It’s actually possible for whole life coverage to be 10 to 20 times more expensive than term life. With that in mind, if you were to purchase a whole life policy with a value of up to $500,000, your monthly payment would be $400 or more. Remember, though, that a whole life policy accumulates cash value over time and you can borrow against it. 

If you buy life insurance when you are young and healthy, you can lock in a more affordable rate. It becomes increasingly difficult to pass a medical exam as you grow older, and that is especially true if you have chronic health conditions.

Buying coverage when you are older or sickly will likely require you to purchase guaranteed issue life insurance, which provides a low death benefit while being relatively expensive.

Basic Life Insurance Calculation


Using a pencil and paper and this equation, you can also determine how much life insurance you need:

  • [Financial obligations you want to cover][existing assets that can be used toward bills] = Your life insurance need.

Among the financial obligations, you might include are the following:

  • Income replacement. You can replace the income by multiplying the salary you want by the number of years that you would like it to last. Make sure that the income replacement will cover both current spending and possible future spending as well.
  •  A mortgage. So your family can remain in their home, you can include the balance of their mortgage. Assuming income replacement (above) makes up for mortgage payments and other expenses, no additional mortgage funds are needed.
  • Other large debts. Would your family be struggling to pay off other large debts, like student loans, if you died suddenly? If so, include them.
  • Children’s college tuition: Ensure that your kids will be able to afford college when you’re no longer alive.

Below are a few items you may want to put under “existing assets that can be used for bills”:

  • Existing life insurance. Subtract the amount of other life insurance that provides a financial cushion. If you rely on supplemental life insurance from work, be careful since it does not follow you when you leave the job. As such, this might not be available when you need it.
  • Savings. Remove any savings used to pay expenses from your budget. If your beneficiaries want to keep retirement savings for their retirement years, you can include them in your analysis or leave them out.
  • College 529 savings. When you calculate your life insurance needs, you can deduct any money in a 529 account that’s designated for your children.
  • Funeral expenses. Life insurance is often purchased for the purpose of covering funeral and final expenses. Some people purchase burial insurance if the cost is not covered by their larger policy.

The “10 Times Earnings” Rule of Thumb


For the purpose of life insurance, it’s generally recommended that you have at least one policy with a death benefit equal to roughly 10 times your annual salary —  this is before taxes and other paycheck deductions. Others, however, advise that this can be as low as 5 times or as high as 20 times your income. Regardless, your beneficiaries will receive the death benefit when the policy pays out. And, this is the money that they can use to support themselves financially after your passing.


This is a simplified strategy, as is the case with all rules of thumb. In this plan, your asset position, income, and beneficiaries’ needs are not considered in detail — with the exception of income. The result of this approach may reveal that you’re significantly underinsured. At the same time, it’s not recommended as the best method when purchasing life insurance. Ideally, you would review your unique needs more thoroughly before deciding on an exact amount.


Nevertheless, you can use the 10-times-earnings rule as a starting point for an estimate.

Why 10 Times Your Annual Income?

It seems like a lot of money to many of us to get paid 10 times what we earn each year. For instance, you could have a policy valued at $350,000 if you make $50,000 a year as long as you choose coverage at 7 times your annual income. This amount might actually be more than you currently have in your retirement account.

In reality, with what the money will pay for, the “10 times earnings” rule may seem logical.

The income replacement amount that ten times your annual income provides could be just enough to help most families financially for several years while they grieve your loss. Again, the proceeds of a life insurance policy can be used to cover burial expenses and leave some money for college savings for a child or a retirement nest egg for a spouse. Additionally, the benefit may reduce long-term living expenses for a policyholder’s family when large debts such as mortgages are paid off, thereby preventing a spouse from having to refinance on their own.

All of these expenses can add up to a hefty amount. But, there’s a good chance that, when you add up all your expenses, your grand total will land somewhere close to ten times your income. Therefore, the rule of thumb.

Is Employer-Provided Life Insurance Enough?

While employer-provided life insurance is a great benefit for employees, it’s not usually enough to cover the needs of your survivors if you were to lose your job.

One to two times your annual income is the typical amount of life insurance provided by your employer. And, for a majority of families, that’s definitely not enough to cover essential expenses.

Additionally, coverage is dependent on where you work. That means life insurance coverage could be lost if you leave your job, are fired, or need to leave for medical reasons. Typically, policies end when an employee leaves a job. Having a medical issue could make getting private life insurance more difficult, if not impossible if your job is lost due to a medical issue.

A smart move is to purchase life insurance independent of your employer while you’re young and healthy. You’ll reduce the cost of the funeral and your family will be better off financially in your absence knowing you helped them.

Where the Life Insurance Rule of Thumb Falls Short

Have you ever bought a piece of clothing that was supposed to be ‘one size fits all?’ As you know, the problem is that we all have different sizes, shapes, and preferences. As such, this is extremely problematic. The same goes for any rule. Not everyone will fit the bill.

Let’s say the breadwinning parent wishes to replace their income over the long run. The parents of this family will need enough insurance to fund the spouse’s early retirement if the spouse is willing to stay home with the children. Using the 4% withdrawal rate rule, that can be 25 times your annual expenses, or 15 to 20 times your income before taxes. And, a person who wishes to cover their children’s college costs may need even greater coverage — if you recall, life insurance proceeds usually aren’t taxed.

In addition to working parents, there are stay-at-home parents who aren’t bringing in an income. This means that 10 times there would be zero. However, parents who undertake this responsibility provide invaluable contributions to their families and should be financially protected. Individuals with these conditions should calculate how much coverage they need based on their children’s ages and how much childcare and other expenses will cost until their children become adults.

In addition, a rule of thumb may not work for individuals with significant debt, additional dependents like aging parents or siblings needing long-term care, or other unique situations. In addition, the rule disregards existing assets. Because of this, you may not need additional life insurance coverage if you are financially independent.

For the reasons listed above, you should calculate your individual requirements instead of solely relying on the income rule. 

The Income Rule vs. the DIME Formula and Other Alternatives

The income rule is not the only rule of thumb to consider when considering life insurance. For example, the DIME formula, which emphasizes the following four things: 

  • Debts. Add up all loans of your balances. But, do not include your mortgage. 
  • Income. Calculate the amount you need to support your dependents by multiplying your income by the estimated length of time they will need assistance. For instance, it may be until your youngest child’s college graduation. This might not be necessary if no one depends on your income. 
  • Mortgage. Make a list of all the debt you owe on your house, including any second mortgages or lines of credit that you may have borrowed against it. 
  • Education. Determine how much it would cost you to send your children to school.

You can then estimate the amount of coverage you may require by adding up the above costs. If you have an existing insurance policy, you may wish to reduce that number or increase it to reflect anticipated future salary increases.

Instead of paying attention to your current income, DIME looks at specific spending categories. As a result, it may better meet the essential needs of your dependents. Even with these categorizations, though, your beneficiaries may still encounter problems if their expenses do not fit within those categories.

Other Approaches

It’s also possible to calculate how much life insurance you need using several other methods, some of which can be very complicated. In the case of the Human Life Value approach, more complex calculations are used to estimate the present value of your future earnings over a specified period of time. 

In addition, you can decide how much income you would like to provide to your survivors over a number of years, as well as the amount to provide them each year. Depending on a conservative interest rate, you can determine the death benefit amount by using a financial calculator.

In terms of calculation, though, the 10-times-income rule is probably the easiest to apply. But, again, it may result in a lower degree of accuracy.

How Do I Calculate How Much Life Insurance I Need?

Let’s say that you decide to calculate your monthly payments based on your income. If so, you need to multiply your gross income (before taxes and other payroll deductions) by your multiplier. 

Say that you earn $70,000 per year and you want 10 times your salary. You would multiply that amount by 10 in order to get $700,000. Please note that according to this rule, each wage earner in your household would need to purchase $700,000 of coverage. So two parents earning $70,000 each would each need $700,000 of coverage.

It’s impossible to predict the future. With that in mind, it’s still essential to try and find an amount of coverage that’s just right to help address the unexpected. After all, the survivors of an underinsured person may suffer financial hardship after the loss of a dependent. It’s also unwise to overinsure your policy. Although this is rare, it can lead to paying more in premiums than you should.


How Much Life Insurance Should You Carry FAQs?

What is the life insurance coverage rule of thumb?

Life insurance coverage should be around 10-15 times your annual income, according to experts. This will ensure that your dependents receive sufficient long-term coverage.


What’s a good calculation for how much life insurance you need?


Use this formula:

Financial obligations you need or want to be covered, like your annual income for five years;



Savings or any other liquid assets that can be used to pay your financial obligations 


= Equals

The amount of insurance you need. 

Comparing life insurance quotes becomes easier after determining how much coverage you need.


What does life insurance cover?

A life insurance claim can be used to pay for a number of expenses. Funeral expenses, school tuition, and mortgage payments are some of the more common uses of proceeds.


When should I buy life insurance?

It’s a good idea to obtain life insurance as soon as possible, even if you don’t have an urgent need for it. In order to lock in more coverage at the lowest cost, you should buy a policy while you’re young so that your rate will be lower as you age and your health worsens.


What are some tips for buying life insurance?

The price of life insurance isn’t the only factor to consider when purchasing a policy. Over the years, your health and insurance needs will change, so you need a policy that can adapt to these changes. It’s possible to convert term life insurance policies into permanent policies by choosing the right insurance company.

It’s also wise to prepare for the life insurance medical examination. A few tweaks to your daily routine and eating habits leading up to an exam can help increase your chances of scoring higher on your test, which will land you a more favorable rate.


About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More