How Much Term Life Insurance Do You Need? A Worksheet, Not a Rule of Thumb

Why "10 times your income" fails

The multiplier shortcut ignores the two numbers that matter most: how long your family would need the income replaced, and how much debt would come due at once. A 30-year-old with a $400,000 mortgage and a newborn needs far more than ten times salary; a 58-year-old with a paid-off house and adult children may need almost nothing. Use the worksheet instead. It takes about ten minutes.

The DIME-plus worksheet

1. Debt. Mortgage balance plus car loans, student loans, credit cards and any co-signed obligations. Add $15,000 for final expenses.
2. Income replacement. Your after-tax annual income times the number of years your household would need it. Use the years until your youngest child is 22, or until your spouse reaches retirement age, whichever is longer. Do not inflate for raises; the lump sum will be invested.
3. Mortgage is already in line 1; the "M" in DIME reminds you not to leave it out. If you would rather your family keep paying the mortgage from replaced income, count it once, not twice.
4. Education. About $100,000 per child for a four-year public university, $250,000 for private. Adjust to what you would actually fund.
5. Subtract liquid savings, retirement accounts your survivors could access, existing group life insurance at work (count only half of it, since it ends when the job does), and any Social Security survivor benefits you expect.

The result is your coverage need today. Round up to the nearest $250,000; the incremental premium is small and carriers price in bands.

Three worked examples

Notice the 32-year-old needs about 20 times income and the 55-year-old needs under three times. No multiplier gets both right.

Choosing the term length

Your term should end when the largest line in your worksheet goes to zero. For most families that is the year the youngest child finishes college or the year the mortgage is paid off, whichever is later. Pick the standard term at or above that number: 20, 25 or 30 years. Buying short to save money is a false economy because you will be older and possibly less healthy when you need to re-buy.

Laddering two policies

If your need drops sharply at a known date, buy two policies instead of one. The 32-year-old above might buy $1,000,000 for 30 years (income replacement through the spouse's retirement) and $750,000 for 20 years (mortgage and college). The 20-year policy falls off when those obligations end, saving roughly 20% versus a single $1.75 million 30-year policy. Ladder's adjustable product and buying two policies from a traditional carrier both achieve this.

Questions

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