How to Decide How Much Life Insurance You Actually Need

Calculate life insurance coverage based on your debts, income replacement needs, and dependents' future expenses.

  1. Add up all your debts that others would inherit. List your mortgage balance, credit card debt, car loans, student loans, and any other debt your family would need to pay off. This is your baseline coverage need. If you have $300,000 left on your mortgage and $50,000 in other debts, that's $350,000 minimum.
  2. Calculate how much income your dependents need replaced. Multiply your annual income by the number of years your dependents will need support. If you make $80,000 and have young kids who need 20 years of support, that's $1.6 million. Subtract any income your spouse earns that they could maintain without you.
  3. Factor in major future expenses. Add college costs for your kids and any other big expenses your family would face. College at a public university costs around $25,000 per year as of 2026, so budget $100,000 per child for four years. Private schools can cost $200,000 or more per child.
  4. Subtract assets that could cover these costs. Reduce your total by existing life insurance through work, savings accounts, and investment accounts your family could access. Don't count retirement accounts like 401(k)s since early withdrawals come with penalties. If you have $100,000 in savings and $200,000 in work life insurance, subtract $300,000.
  5. Cross-check with the income multiplier rule. Compare your calculation to 8-12 times your annual income — the standard rule financial planners use. If you make $80,000, that's $640,000 to $960,000 in coverage. If your detailed calculation is way off from this range, double-check your math.
  6. Round up to the nearest $50,000 or $100,000. Insurance companies typically offer coverage in round amounts, and the cost difference between $850,000 and $900,000 is usually minimal. Rounding up gives you a buffer for inflation and unexpected costs. Term life insurance is cheap enough that a little extra coverage won't break your budget.