Life insurance has one job: make sure the people who depend on you are financially okay if you're gone. The hard part is figuring out the right amount. Too little leaves your family short. Too much costs premiums you don't need to pay.
The quick rule of thumb
You'll often hear that you need 10 to 12 times your annual income. It's a reasonable starting point, but it ignores your actual debts, savings, and how many years your family would need support. A more precise method takes about ten minutes.
The DIME method
DIME stands for Debt, Income, Mortgage, and Education. Add up each one:
Debt
Total all debts other than your mortgage: car loans, credit cards, student loans, and personal loans. Add an estimate for final expenses.
Income
Multiply your annual income by the number of years your family would need it. Many parents use the number of years until their youngest child turns 18 or finishes college.
Mortgage
Include the remaining balance on your mortgage so your family can stay in the home.
Education
Estimate what you'd want to cover for each child's college or training.
Add the four totals, then subtract existing savings, investments, and any life insurance you already have, such as a policy through work. The result is your coverage gap.
Don't forget stay-at-home parents
A parent who doesn't earn a paycheck still provides childcare, transportation, cooking, and household management. Replacing those services costs real money, so stay-at-home parents need coverage too.
Why employer coverage usually isn't enough
Group life insurance through work is a helpful benefit, but it's often only one or two times salary. It also typically ends when you leave the job. Many families use it as a supplement, not their main coverage.
Term vs. permanent life insurance
Term life insurance covers you for a set period, such as 20 or 30 years. It's usually the most affordable way to get a large amount of coverage during the years your family depends on your income.
Permanent life insurance, such as whole or indexed universal life, lasts your whole life and can build cash value. It costs more, but it can play a role in estate planning, tax planning, or leaving a guaranteed inheritance.
The right choice depends on your budget, how long you need coverage, and your other goals. Many families use a combination.
Coverage you can use while you're alive
Some policies include living benefits, which let you access part of the death benefit early if you're diagnosed with a qualifying critical, chronic, or terminal illness. That can help pay for treatment or replace lost income.
Read more: What are living benefits on life insurance?
Review your coverage after big life events
Revisit your coverage when you get married, have a child, buy a home, change jobs, or get a significant raise. Your needs change as your life does.
Get a free coverage review
Not sure if you have the right amount? Jeeyar Solutions will walk through the numbers with you and explain your options in plain language. Request your free review.
This article is for educational purposes only. Coverage availability, features, and costs vary by insurer, policy, and state.
