How Much Life Insurance You Need, and What Types Fit

Most people either have no life insurance or a policy they picked years ago without checking whether it still matches their life. Both leave real gaps for the people who depend on you.

The simplest approach, multiplying your income by 10, is a quick starting point, but it’s also too simple to rely on by itself. It skips debt, your mortgage balance, and future costs like your kids’ education, so it tends to miss the real number in either direction.

A more complete approach is known as the DIME method, which adds up four separate pieces: your outstanding non-mortgage debt, your income multiplied by the number of years your dependents would need it replaced, your remaining mortgage balance, and the estimated cost of your children’s future education. Add those four numbers together and you get a total closer to what your household would need to maintain its footing without you.

The right number also depends heavily on who’s counting on your income.

If you’re single with no dependents and you already have enough savings to cover your final expenses, you may not need life insurance at all, unless you carry debt someone else would inherit or you want to leave something behind intentionally.

If you have a spouse but no children, the math centers on replacing your contribution to the household and covering shared debt for as long as your spouse would need the support. That tends to be a shorter window than a family with kids, since there’s no child’s age tied to the timeline.

If you have a spouse and children, the number goes up and the timeline stretches out. Income replacement needs to run until your kids are grown, not just until your spouse remarries or adjusts. Add the mortgage, add future education costs, and the total is usually the highest of the three scenarios.

Once you know the number, the next question is which type of policy gets you there.

Term life covers you for a set period, ten, twenty, or thirty years are common, at the lowest cost per dollar of coverage. It doesn’t build cash value, and renewing after the term ends costs significantly more, since you’re older by then. For most people covering a mortgage or raising kids, term is an efficient way to get a large amount of protection for a limited number of years.

Whole life insurance covers you for your entire life, as long as premiums are paid, and builds cash value you can access later. Premiums are higher than term for the same death benefit, since you’re paying for lifetime coverage and a savings component together.

Universal life is also permanent coverage, but with flexible premiums, you can pay more or less in a given year as long as enough is paid to keep the policy in force. Two common variations build on this flexibility: indexed universal life, where cash-value growth is tied to a market index like the S&P 500 within caps, and variable universal life, where you choose investment subaccounts directly, carrying more upside and more risk than either whole life or indexed universal life.

Annuities solve a different problem than life insurance. Where life insurance protects people who depend on your income, an annuity protects you against outliving your own money.

A fixed annuity guarantees a minimum interest rate set by the insurer. A fixed indexed annuity credits interest based on a market index’s movement, within caps, but it has a guaranteed floor, so a drop in the index won’t reduce your principal, even though it also won’t earn anything that year. A variable annuity ties your return to investment subaccounts you choose, which can gain or lose value. Immediate annuities begin paying income shortly after you fund them, while deferred annuities grow for a period of years before payments start, often timed with retirement.

That’s part of what I do as a CFP® professional and licensed Illinois Life Producer, bringing life insurance and annuity planning together with the rest of your financial picture. Let’s talk about your own coverage and whether it still fits your life.

Jay Sexton is a finance instructor, doctoral candidate in Personal Financial Planning, and owner of Sexton Finance. He writes about financial identity, as well as the practical, behavioral, and emotional dimensions of financial decision-making at sextonfinance.com.