How to figure out how much life insurance you actually need

Most people are underinsured for life insurance because they reach for a rule of thumb when they should reach for arithmetic.

“10x your income” is a starting point, not an answer. It assumes your obligations look like everyone else’s — and they don’t. Here’s the actual method.

Step 1: List your obligations

Walk through every line of financial obligation that would still exist if you weren’t here tomorrow:

Final expenses

• Funeral and burial: $10,000-$15,000 average
• Outstanding medical bills: variable
• Estate settlement costs: $5,000-$15,000

Debts to pay off

• Credit cards
• Auto loans
• Personal loans
• Student loans (federal student loans are typically discharged at death; private ones often aren’t)

Mortgage

• Remaining balance you’d want paid off so your family can stay in the home

Children’s future needs

• College: $200,000-$400,000 per child for 4 years at a private school; $100,000-$150,000 in-state public; need-based aid and 529 savings can reduce this
• Dependent care if your spouse needs to work more or hire help

Income replacement

• Annual household contribution × years your family still depends on you

Charitable or family commitments

• Anything you’ve promised that you’d want fulfilled

Step 2: Subtract what your family already has

Assets that would offset insurance need:

• Existing savings (not retirement, since that’s for your spouse’s later years)
• Employer-provided life insurance (typically 1-2x salary — verify and don’t rely on it lasting if you leave the job)
• Existing life insurance policies you already have
• Pension or survivor benefits (military, government, some private)
• Social Security survivor benefits (significant for families with minor children)

Don’t subtract: retirement accounts your spouse will need for retirement. That’s not “free” money — it’s already earmarked.

Step 3: The arithmetic

Total obligations - Existing assets = Insurance need

That’s it. The number you get is roughly how much death benefit you should carry.

Worked example

A 38-year-old parent of two, household income $140,000, spouse earns $60,000:

Obligations:

• Final expenses: $20,000
• Mortgage balance: $340,000
• Credit card + auto debt: $30,000
• College for two kids (in-state public): $280,000
• Income replacement (15 years × $80,000 contribution): $1,200,000
• Total: $1,870,000

Offsets:

• 401(k): $180,000 (kept for spouse’s retirement — don’t subtract)
• Savings: $40,000
• Employer life insurance: $140,000 (1x salary)
• Social Security survivor (estimated): $250,000 NPV
• Total offsets: $430,000

Insurance need: $1,870,000 - $430,000 = $1,440,000

Round up: a $1.5M-$1.75M term policy is appropriate.

Term length: how long do you need it?

Pick the longest term that covers your major obligations:

• Until youngest child is independent: typically 20-25 years if you have young kids
• Until mortgage is paid off: typically 15-30 years
• Until you’re financially independent: typically until 60-65, at which point your investments should replace insurance

For most parents of young children, 20-year or 30-year term makes sense. 30-year is more expensive but locks in the rate while you’re young and healthy.

Why term, not whole

For 95% of people, the answer is term insurance. Here’s why:

A healthy 35-year-old can buy a $1.5M, 20-year term policy for roughly $50-$70/month. The same person buying whole life would pay $800-$1,200/month for equivalent coverage — and most of that excess premium goes into a cash-value account that grows at 2-4% annually.

The math overwhelmingly favors: buy term + invest the difference. Over 20 years, the difference invested in a low-cost index fund would significantly exceed the cash value the whole life policy builds.

Whole life makes sense in narrow situations: high-net-worth estate planning, special-needs trust funding, business succession, very specific tax strategies. For everyone else — including most people who get sold whole life policies — term is the right answer.

How to shop

Three channels, used in combination:

1. Direct-to-consumer term carriers (Haven Life, Ladder, Bestow, Ethos) — fast online quotes, often no medical exam for healthy applicants under certain coverage levels
2. Independent insurance brokers — they can shop multiple carriers for you, useful for complex situations or larger coverage amounts
3. Carrier direct quotes (State Farm, Northwestern Mutual, MassMutual, others) — sometimes competitive, especially for fully-underwritten policies

Get quotes from at least 3 sources. The spread between cheapest and most expensive for identical coverage can exceed 30%.

When you might need more (or less)

You might need more:

• Stay-at-home parent who provides labor worth $50K-$80K/year (childcare, household management, etc.)
• Business owner whose business depends on you personally
• High-income earner where lifestyle inflation has outpaced savings
• Significant charitable commitments

You might need less:

• No dependents and no significant debt
• Already approaching financial independence
• Spouse has high income and would not need replacement support
• Most major debts already paid off

What to do this week

1. Block 30 minutes. Open a spreadsheet.
2. List your obligations and offsets per the framework above.
3. Calculate your number.
4. Get quotes from at least 3 sources.
5. Buy the policy. Done is better than perfect — you can always increase coverage later if your situation changes.

The cost of being underinsured at the wrong moment is catastrophic. The cost of being slightly over-insured is a few dollars a month. Lean toward the side of more.