How Much Term Life Insurance Do I Need?

Q. I am considering purchasing a Term life insurance, but not sure how much do I need.  Is there a rule of thumb for Term life coverage amount a family needs?

A. Below is a methodology you can consider:

Coverage Period
When choosing a term life insurance policy, it is important to select a coverage period that best fits the time in which income replacement is needed.  You pay level premiums (payments that do not increase) during the coverage period. When selecting a coverage period you may want to pick a period that is at least as long as the number of years in which your beneficiary can afford to retire.

Coverage Amount
I recommend using the DIME method to estimate the amount of term insurance you need:

• D: debt (exclude mortgage).  How much debt (car loan, student loan, etc.) do you currently have?
  
• I: income (your income). How much will be the lost income if anything happens to you?  Use 3-5 years or up to 30 years to estimate the amount of income your insurance policy will pay out to your beneficiary.
  
• M: mortgage. How much mortgage balance do you have?
  
• E: education expenses for your kids. Consider the growth of such education expenses.  For example, if your child is at age 8, this year's average education expense is $50K per year, in 10 years, that amount might increase to $100K per year.
  

Add up the above amount, you will have a range of numbers for the insurance coverage you need.

You can also use our free online insurance amount calculator to do the estimation.

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