Start with your debts and dependents
The amount of life insurance you need depends on three things: what your family would owe if you died, what they would need to live on, and what assets they already have. Most people need between five and ten times their annual salary, but that's a starting point, not a rule. The real number comes from adding up specific obligations and subtracting what's already in place.
Begin by listing your debts: mortgage balance, car loans, credit cards, student loans, and any other money you owe. Then estimate how much your family would need per year to maintain their current standard of living — groceries, utilities, insurance, childcare, property taxes. Multiply that annual number by however many years you think they'd need support (often until the youngest child finishes college, or until a spouse reaches retirement age). Add any major expenses you know are coming: a child's college tuition, aging parent care, a funeral.
Subtract what they'd have: savings, investments, retirement accounts they could access, any existing life insurance through an employer. The difference is roughly what you need to buy.
Key Takeaways
- Add up your debts, years of living expenses your family would need, and major future costs, then subtract savings and existing coverage to find your target amount.
- Most people need five to ten times their annual salary, but this varies sharply based on dependents, mortgage size, and how much you've already saved.
- Term life insurance (20 or 30 years) is usually cheaper than permanent coverage and covers the years when you have dependents and debt.
- Review your coverage every few years or after major life changes — a new child, a home purchase, or paying off a loan — because your needs shift.
- Your employer may offer group life insurance at no cost to you, which counts toward your total but often isn't enough on its own.
Work through the math with a real example
Say you earn $60,000 a year, have a $250,000 mortgage, two young children, and $40,000 in savings. Your spouse doesn't work outside the home. You estimate your family would need $45,000 per year to cover the mortgage, property tax, food, utilities, childcare, and insurance. If you want coverage until your youngest turns 18 (16 years), that's $720,000 in living expenses.
Add your debts: $250,000 mortgage plus $15,000 in car and credit card debt equals $265,000. Add a college fund buffer of $100,000 for both kids. Your total need is $720,000 plus $265,000 plus $100,000, which is $1,085,000. Subtract your $40,000 in savings. You need roughly $1,045,000 in life insurance.
If your employer offers $30,000 in free group coverage, you'd buy a term policy for about $1,015,000. That sounds like a lot, but a 20-year term policy for that amount costs most healthy 35-year-olds between $40 and $70 per month. The math changes if you have no dependents, own your home outright, or have a working spouse with separate income — your number would be much lower.
Why term life usually makes more sense than permanent coverage
Term life insurance covers you for a set number of years (typically 10, 20, or 30 years) and pays out only if you die during that term. Permanent life insurance (whole life or universal life) covers you for your entire life and builds cash value you can borrow against. Permanent coverage costs 5 to 15 times more per month than term.
For most people with dependents, term is the right choice because your insurance needs are temporary. Once your kids are grown, your mortgage is paid off, and you've built retirement savings, you don't need as much coverage. A 30-year term policy bought at age 35 expires when you're 65 — around the time you stop needing to replace your income. Permanent insurance makes sense only if you have ongoing estate taxes, a disabled dependent who will need lifelong support, or significant wealth you want to pass on tax-efficiently.
Buy term coverage that lasts until your youngest dependent is independent or your major debts are gone — whichever comes later. If your situation changes (you pay off the mortgage early, you have another child), you can buy an additional term policy rather than trying to adjust permanent coverage.
Account for inflation and income changes
The $1,045,000 you calculated today won't feel like enough in 15 years if your family's expenses grow with inflation and your income rises. Some people buy a policy amount that's slightly higher than their current calculation to account for this drift. Others buy a term policy with a cost-of-living rider, which increases your coverage amount by a set percentage each year (usually 3 percent) to keep pace with inflation.
A simpler approach: buy what you need now, and plan to review your coverage every three to five years or after major life events. If you get a significant raise, have another child, or buy a larger home, recalculate. You can often buy additional term coverage at your new age without losing the old policy. Some employers also let you increase your group coverage during open enrollment or after a may have access to event like a birth or marriage.
Don't forget about your spouse's coverage
If your spouse stays home with children or earns significantly less than you, they still need life insurance. If they died, you'd face childcare costs, housekeeping help, or lost income if you had to reduce work hours. A stay-at-home parent might need $300,000 to $500,000 in coverage; a working spouse might need the same calculation you did for yourself.
Some couples buy joint policies (one policy covering both people), but separate policies are usually cheaper and more flexible. If one spouse dies, the survivor keeps their own coverage without renegotiating. Joint policies also become complicated if you divorce.
Review your coverage after major life changes
Your insurance needs shift when you get married, have a child, buy a home, change jobs, or pay off debt. A new baby means you need more coverage for longer. Paying off your mortgage means you need less. A job loss or income drop might mean you need to lower your coverage amount to keep premiums affordable. A significant inheritance or bonus might mean you can reduce coverage because your family's financial cushion grew.
Set a calendar reminder to review your coverage every few years. It takes 15 minutes: recalculate your debts, estimate your family's annual expenses, and see if your current policy amount still fits. If it doesn't, you can usually buy more coverage without a new medical exam (though rates will reflect your current age). If you need less, you can let a term policy expire or shop for a smaller amount when your current term ends.
Frequently Asked Questions
What if I can't afford the coverage amount I calculated?
Buy what you can afford now, even if it's less than your ideal number. A $300,000 policy is better than no policy. As your income grows, you can buy additional coverage. Term insurance is cheap enough that most people can afford a reasonable amount — if the monthly cost feels high, you may be looking at permanent insurance by mistake.
Does my employer's group life insurance count toward what I need?
Yes, but it's usually not enough on its own. Most employers offer one to three times your salary in free coverage. If you earn $60,000 and your employer covers three times that ($180,000), it counts toward your total need. But if you calculated that you need $1,000,000, you'd still buy an individual policy for the remaining $820,000. Group coverage also ends if you leave the job, so you can't rely on it long-term.
Should I buy life insurance if I have no dependents?
Probably not much. If no one depends on your income and you have no debts, you don't need life insurance to replace lost earnings. You might buy a small policy ($25,000 to $50,000) to cover funeral costs and any outstanding bills, so your family doesn't have to pay out of pocket. Once you have a spouse, children, or a mortgage, your needs change.
Can I change my coverage amount if my needs change?
Yes. If you're still within your current term, you can usually buy an additional policy without losing the old one. When your term ends, you can buy a new policy for whatever amount you need at that time. Some policies have riders that let you increase coverage without a new medical exam, though you'll pay higher rates for the additional amount.
What happens if I outlive my term policy?
The policy expires and coverage ends. You stop paying premiums. If you still need coverage at that point, you can buy a new term policy, though your age will be higher and premiums will be more expensive. Many people plan for this: they buy a 30-year term at age 35, and by age 65 they've paid off the mortgage, the kids are independent, and they have retirement savings, so they don't need as much coverage anymore.