How Much Protection Do You Need? Calculating Your Life Insurance Coverage

You’re past the shopping hurdle for the best life insurance coverage, but the most crucial question sets in. How much coverage do you need?

There’s no specific answer to this question because the type of protection you need depends on multiple factors. For example, it may depend on your budget, needs, market, duration, health, and more.

In this discussion, we explore how to calculate your life insurance coverage and things to keep in mind. Learn more here.

Why Do You Need Life Insurance Coverage

Statistics reveal that up to 52% of U.S. citizens own life insurance. Despite the disappointing  number, life insurance is important because it protects your loved ones from financial losses should you be unavailable to provide for them.

It offers financial security to your dependents by paying off debts, mortgages, college fees, and settling their living expenses. It also helps pay for medical and burial expenses.

Notably, a good insurance policy accommodates all changes that may occur in your life over time. Situations change, so price should not be the only guiding factor.

Types of Life Insurance Policies

There are two main types of life insurance policies, term, and permanent life insurance policies.

Whereas term insurance policy has a limited period, permanent life insurance extends until death as long as you pay your premiums.

It also has a savings component that enables you to earn payouts upon maturity.

How To Calculate Life Insurance Coverage

Contrary to what most people expect, you don’t need to use a complicated mathematical equation to determine your life insurance coverage.

Nor do you need a complex computer program to develop optimal life insurance protection.

Indeed, you can determine your coverage with just a pen and paper.

But, before you begin the calculations, the first step is to estimate your financial obligations. Then deduct your current assets used towards paying utilities.

The difference is your life insurance coverage.

Financial Obligations

So, what are financial obligations that you’d like to cover;

Using the income replacement ratio, you can predict the amount of income needed to cover future expenses.

Simply put, it’s the proportion of your present earnings you’ll probably need to keep up your dependent’s current quality of living once you pass on.

According to this rule of thumb, you’ll need 70% * 80% of your current income to cover the future needs.

Once this is determined, you may estimate your life insurance coverage.

1. Estimate your expenses

Estimating your future expenses may not be pegged on current expenses because needs are likely to change.

For example, you may be commuting to work and incurring work-related costs which may not be relevant in the future.

Likewise, some loans you’re servicing now may be closed in many years to come and future taxes may be lower.

Nonetheless, other expenses such as travel, medical, and vacation may affect future income.

It’s essential to estimate how much will be incurred depending on specific preferences and situations.

2. Project Future Debt or Liabilities

In estimating the future obligation, you can project the balance of your debts in the future.

Include your mortgage balance so your family will have adequate coverage if your income level declines.

Also, look at other debts so that your family does not struggle to pay in case of your demise.

3. Estimate Children’s Schooling Needs

Your children’s tuition needs should be essential to your future obligations.

By including them in your coverage, you’ll be guaranteed that your children will complete their education if you’re not around.

Current Assets to Pay Future Bills

After estimating your future obligations, the next step is to calculate your current assets covering future commitments.

Here are some key aspects of existing assets.

1. Other Life Insurance

Do you have another life insurance policy in place to offer financial protection? You can deduct this amount from your financial obligations.

Fair warning! Don’t rely on supplemental life insurance provided by your employer because there’s no guarantee you’ll be working there in later years.

2. Savings Plan

It would help if you deducted the portion of your savings that would be used to meet future obligations.

Further, include current retirement plans, such as the 401(K) plan, in the total amount to deduct.

However, if your dependents want the 401(K) in retirement, you can pass over.

Another type of savings to deduct is college 529 savings for your children.

3. Funeral Costs

Some people may want their life insurance policy to include the final expenses. However, some policies have separate burial insurance policies for their clients. Be sure to include it too.

Other Methods To Calculate Your Life Insurance Coverage

Besides the simple arithmetic method explained above, there are other methods you can use to calculate your insurance coverage.

The DIME Approach

The DIME approach is the most common that involves adding up the following;

1. Debt

You need to estimate the amount of debt you’d leave your beneficiaries. It includes student loans and all credit card debts.

2. Income

This is similar to the income replacement ratio mentioned earlier in this text. You can multiply your current income by the years you’d like to offer income replacement for your dependents.

3. Mortgage

Estimate your mortgage balance when you’re out of employment or during retirement.

4. Education

Include the tuition and accommodation fees for all your kids.

Even though this method is an excellent way to calculate your coverage, it doesn’t include existing assets your family may use if you’re not around.

Multiplying Your Earnings by 10

The rule of thumb is always multiply your earnings by 10. Nonetheless, the number is not cast in stone because other numbers, such as 5 and 7, have been used to tie down the amount of life insurance coverage.

After multiplying, subtract the value of assets your dependents could use in the future if you’re no longer there.

Another option is to multiply your earnings by ten and include the estimated amount for your child’s education fees.

In this way, you can put an arbitrary figure such as $100,000 for every child to estimate the amount of life insurance protection you need.

The downside of this method is that it doesn’t consider other expenses or unique circumstances.


How much protection you need depends on the financial obligations your dependents will incur minus your existing assets, such as savings should you not be there.

To determine how much protection you need, consider the expenses your beneficiaries will incur and the amount of money required to cover these costs should something happen to you. These expenses include mortgage payment, living expenses, funeral costs, and tuition fees. After arriving at the estimates, ask your provider for a life insurance calculator to determine the right coverage.

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