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One of the critical steps of buying life insurance is deciding how much you will need, which can be a rather difficult task. Perhaps, the best way to think about life insurance is if it’s a part of your overall life financial plan.

That’s why if you decide to get life insurance, it’s a good idea to consult with a financial advisor who can help you see the gaps and strengths in your current situation. Remember, your decision on which policy and what type of policy to get could considerably change after understanding how life insurance fits into the big picture of your and your family’s finances.

That’s why this article is dedicated to giving you more insight into what life insurance is, why you need it, and how to determine how much coverage you need.

Now without further ado, let’s get started.

What is Life Insurance?

Simply put, life insurance is an agreement you make with an insurance company in which they agree to pay a specific amount of money after you die. It only applies as long as premiums are paid correctly. The amount given after the death of the insured is called a death benefit.

These types of policies are typically used so that the insured person feels certain that their loved ones will have enough financial protection after their death. 

There are two common categories of life insurance: whole and term. Whole policies are permanent life insurance, meaning that you’re covered for life as long as you continue paying your premiums. A number of whole life policies are also an investment tool since they use the money from the premiums you pay and invest them into the market, thus allowing you to build cash value. 

You are only covered for a specific period of time when it comes to term life insurance. Most people purchase a 20 or 30-year policy. Some companies offer to extend your coverage after a certain amount of time, while others require a medical exam. Term life insurance tends to be cheaper than whole life insurance but has certain downsides.

Why Might Life Insurance Be Needed? 

Even though having life insurance is considered to be an excellent financial decision for some, the truth is that buying a policy is not suitable for everyone. If you’re single and no one is depending on your finances, then it’s likely that you won’t get much out of owning a life insurance policy. And even if you have a family that relies on you, if you have enough assets to leave to them after your death, then life insurance may also not be needed. 

However, suppose you’re the person who your family relies on for financial security, or you have a significant amount of debt (more than your assets). In that case, insurance will help you secure a promising financial future for your loved ones if anything ever happens to you. Owning a life insurance policy is also sensible if you own a business or if you have private student loans, which someone else might have to pay for if you suddenly pass away. 

With that said, it’s important to know that life insurance doesn’t cover every possible situation. For example, with a standard life insurance policy, you won’t receive anything if you suddenly become disabled, and it will also not cover any nursing or medical costs. Instead, purchasing disability riders or long-term care insurance comes at additional premium costs specifically for those scenarios.

How to Calculate How Much Life Insurance You Need? 

One way to calculate how much life insurance you need is by using an online calculator, similar to the one here. While those calculators may be helpful with the questions they ask and with the amount they produce at the end, they’re still not the most trustworthy resource for finding that sum out since you don’t always know exactly how they perform their calculations. 

A large part of figuring out how much life insurance you need depends on the amount you think your dependents will need. Financial experts often recommend purchasing a policy 10 to 15 times your annual income in coverage. However, that number might be higher or lower depending on your personal circumstances. With that said, here are some of the factors we think you should take into consideration. 


Normally, life insurance can be used as a way to pay off any outstanding debt – be that mortgages, student loans, or credit card loans. If you currently have any debts, then the policy you opt for should have enough coverage to pay them off in full potentially. So say you have a $300,000 mortgage and a $5,000 credit card loan, that means that you will need at least $305,000 to cover the debt. However, that’s without interest rates, which means that you should consider adding a little extra to the sum to cover any interest or charges. 

Income Replacement 

Many people choose to own life insurance as a way to replace income. If you’re the only provider in the family and bring in, let’s say, $50,000 per year, you will need a policy large enough to replace that income, plus probably a little more as a way to fight off inflation. 

Insuring Others

If you’re considering life insurance, it’s safe to assume that there are people in your life you would want to insure as well. It’s a best practice to ensure only those whose death might have a severe financial impact on the family. As heartless as it may sound, the death of a child, although devastating emotionally, does not usually have any impact on the family’s financial situation because, normally, people spend money to raise children. However, the death of a spouse who earns an income does create a situation where there’s both financial and emotional damage. 

In such cases, the best thing you can do is to combine your and their income when calculating for income replacement. This also goes to other people you have a financial relationship with, such as business partners, especially if you have a shared responsibility to pay out a loan or a mortgage. 

Basic Life Insurance Calculation

If you want to use a formula that will enable you to calculate your life insurance needs, then grab a pen and paper. Below, you will find a basic equation to calculate the coverage you may need and an explanation of how to use it.

Financial obligations you want to cover – existing assets that can be used = your life insurance needs.

In the section dedicated to financial obligations you want to cover, you have to include:

  • Income replacement – as mentioned above, you want to multiply your yearly income by the number of years you think you might need it to be replaced. If you have a spouse, include theirs in the calculation.
  • Debts of any kind – be it mortgages, student loans, credit cards, or some personal debt.
  • Children’s college tuition – that way, you can be sure that your kids will be able to go to college, even if you’re no longer around.

In the existing assets, you have to put:

  • All the savings you have – your family can use that money to pay bills or other financial needs.
  • Funeral expenses – many want their life insurance to be able to cover funeral expenses, but if this cost isn’t part of your initial package, you can buy special burial insurance.

Other Ways to Calculate Life Insurance Needs 

If you think the above-mentioned method doesn’t work for you, then here are some additional ones you can use. 

DIME Method 

DIME is an acronym that stands for debt, income, mortgage, and education. With it, you have to add these amounts: 

  • Debt – how much do you owe overall? That includes credit cards, student loans, and car payments. 
  • Income – take your current yearly income and multiple it by the years you plan to provide for your family. 
  • Mortgage – if you have one, add it to the total.
  • Education – think about how much money would be needed to cover college costs for your children and add it up.

The DIME method is the simplest way to calculate the life insurance need, but it ignores certain essential aspects like the existing financial resources that your family can use. 

Multiplying Your Income

In order to do this, you have to consider how many years you want to support your family and then multiply your income by that number. It can be by 5, 10, 20 depending on the age of your children and your assumption about their financial future.

Final Thoughts 

If you decide to get life insurance, it’s vital that you know how much you need and what kind suits your situation best. Suppose you need help deciding—or just a consultation to see—whether it’s worth it or not. In that case, our suggestion is to get in touch with a financial advisor, who can assess your family’s situation and give you adequate advice.

Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence

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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.

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