We receive advertising fees from the brands we review that affect the ranking and scoring of such brands.
Advertiser Disclosure

How Much Life Insurance Do You Need?

Jackson Forelli Updated: July 2, 2023 • 5 min read
A man in front of the computer not sure how much life insurance he needs

While insurance is necessary for many aspects of our modern lives, individuals tend to overlook the importance of life insurance. An individual can buy a life insurance policy to control the distribution of their own assets after death. Individuals that buy life insurance can avoid putting an unexpected financial burden on their loved ones. There are a lot of costs associated with death, and without a life insurance plan, these costs will fall squarely on the deceased’s family and friends. Parents can help secure their children’s future by making them dependent in their life insurance policy. Personalizing a life insurance policy is a good step for individuals to take.

A Simple Calculation

Many individuals ponder what size life insurance policy they should purchase. While no one has a crystal ball to predict the future, it is important for individuals to take a look at their financial situation in order to make an educated guess. The most common advice is for an individual to choose a policy that covers their current income multiplied by 10-12 years. For an individual earning $100,000, they would be advised to buy a life insurance policy between $1,000,000 and $1,200,000.

DIME Formula and Other Factors

Another way individuals have estimated their life insurance needs is by implementing the DIME formula. DIME stands for Debt, Income, Mortgage, and Education. Adding these four categories together can give individuals an estimate on the size of a life insurance policy they should purchase. Keep reading for a more in-depth perspective on the costs that life insurance can cover.

Burden of Debt

Debt is the first category of the DIME acronym for a reason! When an individual passes away, their debt will be inherited by their beneficiaries. This is not an inheritance that many look forward to! This is why many experts advise individuals to calculate their total debt accumulation when deciding on a life insurance policy. If you have accumulated more debt than assets, your beneficiaries may actually owe money after you die. Things like credit card debt, student loans, car loans, and even business debts will be taken into consideration upon death.

Death Related Expenses

The cost associated with burials and funerals are higher than most individuals would estimate. Many individuals do not want the financial burden of their funeral to be placed upon their family and friends. Planning out the size of the funeral and other final death costs can be taken into consideration when deciding on the size of a life insurance policy. 

Inheritance tax is another death-related expense to consider. When an individual passes away, the assets and property that the beneficiary receives are often taxed. Some individuals may want to account for this tax in their life insurance policy.


Property Mortgages

Mortgages are another form of debt that your beneficiaries will have to deal with after you pass away. An individual should weigh the pros and cons of having a life insurance policy that covers mortgages. If an individual wants their family to maintain ownership of their real estate after death, the individual should plan to cover these mortgage payments in a life insurance policy.

Communication between the policyholder and their beneficiaries is recommended. Setting expectations about the future of a property can help an individual decide whether to include mortgage payments into their life insurance policy. If the beneficiary can make the payments themselves, or if they plan to sell the property, then the policyholder may want to exclude mortgage payments in their life insurance calculations. But if the beneficiary wants to keep the property and does not have the means to pay for it, then including mortgage payments into a life insurance policy makes sense. 

Education Expenses

The cost of education, and in particular higher education, have increased tremendously over the past few decades. Successful financial plans account for the rising cost of higher education.

It is important for a policyholder to determine whether life insurance will account for their child’s educational costs. Many individuals have opened up college-specific 529 savings plans that pay for educational costs in a tax-efficient manner. However, these plans can only cover educational expenses (without tax penalties), so some policyholders may like the flexibility of using their life insurance policy instead. If their child does not go to college, they can still use the life insurance payout in other manners.

Special Needs and Other Unexpected Expenses

Sometimes life throws you a curveball. It is good to account for unexpected expenses incurred by your beneficiary. There has been a recent rise in special needs services. For instance, more children are being diagnosed with autism, and there are services required for this disorder. Putting aside some extra cash as a safety net for these unexpected life events can help put policyholders at ease.

Inflation is another unexpected “expense” that policyholders may want to keep in mind. The United States just experienced one of the highest inflationary years in 2021. Many policyholders want to prepare for their beneficiaries’ insurance payouts to not be worth as much in the future.


Personal Factors to Consider

Many individuals seek to personalize their life insurance planning. There are many personalized factors that will affect an individual’s life insurance game plan. Some of the main factors to look at when deciding on a life insurance policy are: the policyholder’s age, employment status, health situation, and family setup. 

An individual who is under 30 and is single will most likely want a different life insurance policy than an individual in their 60s with a wife and children. Holistic financial planning can be a daunting task for an untrained individual to take on, which is why many individuals use professional help to compare life insurance policies.

Choosing a Life Insurance Policy

Considering the future is uncertain, no one can give a definite answer on the exact amount of life insurance to purchase. However, there are professionals that work very hard to determine the appropriate amount of life insurance each individual should plan for.

There has been a recent trend of individuals who have leveraged innovative technology to choose the most appropriate life insurance policy in the most efficient manner. One example of this is Sproutt, which uses an AI-based method for choosing life insurance policies that are the most accurate fit for each individual. Bestow  is another example of an up-and-coming life insurance marketplace that allows for a fast and efficient application process. Technology is changing many aspects of our lives, and life insurance is just another example of an industry that is adapting to the times.

Article Topics

Jackson is a consultant for a large American Asset Manager, notable clients include Morgan Stanley, Merrill Lynch, and Wells Fargo. He also writes on financial topics, including bitcoin, personal finance, and portfolio construction. Avid skier during the cold New England winters.