How Much Life Insurance Do I Need?

Shane Smith is an assistant director of insurance solutions at Northwestern Mutual.

Getting married, having a baby, buying a home, and making a career move—these are all events worth celebrating. And they’re great opportunities to review your insurance coverage and help ensure that what matters most to you is protected, especially as life changes. Though it may not seem like the right time to update your insurance—the right time to start protecting your loved ones is right now.

How much life insurance you need is as unique to you as your fingerprint. The right amount will depend on many factors specific to your situation. Here’s a look at how to determine how much coverage you need to protect your loved ones.

How to estimate how much life insurance you need

If you’re working, employer-provided life insurance may offer coverage equal to one or two times your annual salary. While that’s a good starting point, for many families it’s not enough. The amount of life insurance you actually need depends on factors such as these:

• Income

• Age

• Student loan or credit card debt

• Outstanding mortgage balances

• Family members who rely on your income

• Major goals you want to fund

• Everyday expenses

There are several common guidelines that attempt to help you estimate how much life insurance you need. One suggests coverage equal to 10 times your annual salary. Another recommends 10 times your salary plus $100,000 per child. A third—the “DIME” method, short for debt, income, mortgage and education—suggests insurance equal to the total of your current debt, 10 to 15 years’ worth of income, your remaining mortgage balance, and anticipated education expenses for your children.

In many cases, supplemental life insurance is needed to close the gap between the coverage your employer provides and what your family needs. While guidelines can offer a starting point, your financial advisor can help you determine the right amount and types of coverage that can help protect your family and keep your financial goals on track.

To determine how much life insurance you need, you’ll want to think about three key factors:

• Income Replacement: How much income would your family need and for how long?

• Debt: How much debt would need to be paid off?

• Future Goals: How much do your future goals cost (such as education expenses, purchasing a house, children’s weddings, etc.)?

To get an estimate of how much life insurance you need, use our calculator.

Once you have an estimate for your life insurance need, you can subtract what coverage you currently have. If you’re working, employer-provided life insurance may offer coverage equal to one or two times your annual salary. While that’s a good starting point, for many families it’s not enough. You also can’t take employer-provided life insurance with you if you change jobs.

What to consider when determining your life insurance needs

As you and your financial advisor determine your coverage needs, there are several factors you’ll want to consider.

1. Your financial situation

Your coverage needs depend on your unique situation. As your advisor evaluates your needs and goals, they’ll likely consider these things:

Ongoing expenses

Get to know your monthly budget. How much do you pay for necessary expenses, such as housing costs, utilities, transportation and groceries? What about discretionary spending, such as entertainment and other “wants”?

They’ll also look at how much monthly debt you’re paying down and what your outstanding loan amounts are. Understanding what your ongoing expenses are will help your advisor determine how much money your family will need to replace your income.

Long-term goals

Your financial plan may include saving for larger goals, such as paying for your kids’ college or weddings, your retirement, and even big vacations. Make sure your advisor takes these milestones into consideration.

Other considerations

Your family situation may also determine some of your needs. For example, stay-at-home parents should have life insurance, too, even though they technically have no salary to replace. A spouse or partner left behind will need to pay someone to provide childcare and other services. In addition, business owners may need more coverage to provide liquidity and time for the family to sell a business. These specific and unique situations are often best addressed by a trained life insurance professional like your advisor.

Decide how long you want the money to last

The amount of life insurance you need will depend in large part on how long you want the money to last and what you're hoping to fund with it. If you’re 30 with a spouse and two kids, you could have many years of income to replace in order to provide for your family. By contrast, a 50-year-old may have fewer years of income to protect and more financial resources already in place.

You might think about leaving behind enough death benefit to get your spouse to or through retirement. Or your priority could be more immediate, like covering your children’s education.

Estimating how long the money should last and what you hope to fund helps you and your advisor determine the right amount of life insurance to help meet your goals.

Consider advantages beyond the death benefit

While the death benefit is probably the main reason your considering buying life insurance, permanent life insurance can have a number of uses during your life:

• The accumulated cash value of permanent life insurance can be an important part of your financial plan, serving as a flexible tool you can use while you’re alive.

• For whole life insurance, cash value is guaranteed never to go down in value over time, which makes it a safer asset that can be accessed while you’re still living to support your financial goals.

• Cash value grows tax-deferred and can be accessed tax-free in many circumstances, which can be helpful for future tax considerations.

• Some permanent policies allow access to the death benefit early to pay for long-term care expenses.

Life insurance policies available today are often customizable, with optional riders, or small add-ons, that help policies better fit your situation. When designed properly to fit you and your family, life insurance can be a flexible financial tool that works alongside investments and other aspects of your money to reach your goals.

Connect with an expert

Your Northwestern Mutual financial advisor can help you think holistically about your financial big picture, determine your needs and find the right policy for you.

They can also potentially reveal opportunities you might have overlooked, making recommendations for ways in which your insurance and investments can work together to grow and protect your money.

Your advisor will also meet with you regularly to help ensure your plan is still meeting your goals. Life can go by fast, and your circumstances will almost certainly change. They can help make sure your plan as a whole—including your life insurance coverage—keeps up.

The primary purpose of permanent life insurance is to provide a death benefit. Cash value accumulates slowly in the early years of the policy; it typically takes several years for cash value to become a useful source of funds. There are different ways to use your policy’s cash value. These different methods have advantages and disadvantages. Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.