Calculate How Much Life Insurance You Need

The "10x your salary" rule is a blunt instrument that overinsures some people and badly underinsures others. A proper needs analysis takes twenty minutes and produces a number you can actually defend: existing assets minus everything your survivors will owe or need, covered by the policy.

What you need

• Your current take-home and gross income figures
• Mortgage balance and any other debt statements
• Estimated annual childcare, education, and caregiving costs
• Current savings, retirement balances, and any existing policies
• Funeral cost estimate for your area (commonly $7,000 to $12,000)

Step by step

1. Add up immediate needs: funeral costs, final medical bills, estate settlement, and any emergency fund top-up you want survivors to have.
2. List all debts that would not vanish at death: mortgage, car loans, private student loans if cosigned, credit cards.
3. Estimate future obligations: years of childcare remaining times annual cost, plus projected education costs per child.
4. Calculate the income replacement gap. Take your annual contribution to household spending, multiply by the number of working years you want to replace, and discount modestly for inflation-adjusted investing of the payout. A common simplification is 10 to 15 times the gap amount.
5. Subtract liquid assets survivors would use: savings, taxable investments, existing group life coverage, and any pension survivor benefit.
6. Add steps 1 through 3 totals, then subtract step 5. That difference is your target death benefit.
7. Price term life for a term matching your obligation window, typically until children are independent or the mortgage retires. Term is almost always right; permanent insurance solves narrower problems.
8. Re-run the calculation after major life events: a child, a home purchase, a salary change, or paying off the house.

Common mistakes

• Counting employer group life as sufficient; it usually pays one to two times salary and vanishes when you leave the job
• Insuring only one spouse in a two-earner household, ignoring the replacement cost of stay-at-home labor
• Naming an amount so large the premium strains the budget, leading to lapsed coverage, which protects no one

Related guides

After buying coverage, lock in the paperwork with [[beneficiary-updates-audit]]. If you also carry high liability limits, check whether [[umbrella-policy-worth-check]] changes your total protection picture.