Life Insurance Needs Calculator

• Adds up the four DIME needs: debts and final expenses, income replacement, mortgage payoff and education.
• Values the income need two ways: plain income times years, and a present value that rises with inflation and is discounted at the return the payout could earn.
• Subtracts life insurance you already own and savings the family could use, then compares the result with the 10-times-income rule of thumb.
• Lets you size the income need from household spending minus a surviving spouse's income and any Social Security survivor benefits.

How to use this calculator

Enter your yearly income, how many years of it your family would need, your mortgage balance, other debts, a college or education fund, and the life insurance and savings you already have. That is enough for a first answer. Open Advanced to add final expenses, change how the income need is sized, include survivor benefits, choose between the present-value and simple income methods, or change the multiple used for the rule of thumb.

Run it for the household's main earner first, then for the other spouse or partner. A parent who stays at home has no salary to replace, but paying for childcare, transport and housework after their death is a real cost, and the household-spending option is a better fit for that case.

The DIME method

DIME is a planning checklist rather than a formula from any regulator. It asks what money your family would need if you died tomorrow, under four headings:

• Debts. Car loans, student loans, credit cards and other debts that would otherwise fall on your estate or a co-signer, plus final expenses such as the funeral.
• Income. The income your family relies on, for the years they would rely on it.
• Mortgage. Enough to pay the home off, so the family can stay without the payment.
• Education. The amount you would want set aside for your children's education.

From the total, subtract the life insurance you already have and the savings the family could draw on. What is left is the coverage gap. The National Association of Insurance Commissioners puts the starting point simply: how much to buy depends on the financial needs that would continue after your death.

How the income need is calculated

Annual need        = your income x share to replace - other survivor income
   (or)              household spending - spouse's income - other survivor income
Simple method      = annual need x years
Present value      = annual need x [1 + q + q^2 + ... + q^(years-1)]
   where q          = (1 + inflation) / (1 + return)
DIME total         = debts + final expenses + income need + mortgage + education
Coverage gap       = DIME total - existing coverage - savings (not below zero)
Income multiple    = income x multiple - existing coverage - savings

The present-value method answers a slightly different question from the simple one: how big a lump sum, invested at the return you enter, would pay an income that rises with inflation each year for the years chosen. When the return is above inflation the present value is smaller than income times years. When they are equal the two methods give the same answer.

A worked example

With the calculator's starting values, a parent earning $80,000 wants to replace all of that income for 18 years. The family has a $250,000 mortgage, $20,000 of other debts, $15,000 for final expenses and wants $100,000 for education. Existing coverage is $100,000 and savings are $40,000.

At 2.5% inflation and a 5% return, the income need has a present value of $1,182,483. Adding debts and final expenses of $35,000, the mortgage and education gives a total need of $1,567,483. Less the $140,000 already in place, the calculator suggests about $1,427,483 of additional coverage.

With the simple method, income times years is $1,440,000, and the gap rises to $1,685,000. The 10-times-income rule gives $660,000 after the same offsets. If the family only needs 10 years of income, the DIME gap falls to $964,507.

Using the household option instead, with $70,000 of household spending, a spouse earning $30,000 after tax and $12,000 a year of survivor benefits, only $28,000 a year needs replacing, and the gap is $658,869.

The income-multiple rule of thumb

A quick shortcut is to buy coverage of about 10 times your income, sometimes 10 to 15 times. It is easy to remember and can be a sensible floor, but it ignores everything that makes one family different from another: a large mortgage, several children heading to college, a spouse with a good income, or savings already set aside. That is why this calculator shows it alongside DIME rather than instead of it. If the two answers are far apart, the DIME breakdown shows which part of your situation the rule of thumb is missing.

Turning the number into a policy

Most families who need this much coverage meet it with term life insurance, which pays only if you die within the term and costs much less for the same amount than permanent policies such as whole or universal life. Two choices matter most:

• The term length. Match it to the years of income you entered: often until the youngest child is independent or the mortgage is paid off.
• Laddering. Some people buy two policies, for example a 30-year and a 20-year term, so coverage falls as the mortgage balance and the years of income left fall.

This calculator does not estimate premiums. Price depends on age, health, tobacco use, the term, the amount and the insurer, so get quotes from several insurers or a licensed agent. Ask what the premium would be if you renew at the end of the term, because renewal premiums are much higher. Group coverage through an employer is useful but usually ends or must be converted if you leave the job.

Assumptions and limitations

• No premium estimates. The answer is a coverage amount, not a price.
• Fixed inputs. Inflation and the return on the payout are constant every year. Real returns vary, so a lower return assumption is the cautious choice.
• Education in today's dollars. College costs rise faster than general inflation in many years, so the figure you enter should allow for that.
• Taxes. Life insurance death benefits are generally not subject to income tax, but income earned on the invested payout can be. The calculator does not model tax on that income or estate taxes.
• Social Security. Survivor benefits are entered by you. Your Social Security statement at ssa.gov shows estimates for your family.
• Not advice. It is a planning estimate to discuss with a licensed agent or financial planner.

Common mistakes

Counting only workplace coverage. A policy through your job often equals one or two years of salary, and it can disappear when you change employers.

Forgetting the stay-at-home parent. Replacing childcare and household work costs money even when there is no paycheck.

Counting retirement accounts as available savings. A surviving spouse may need that money for their own retirement. Include it only if you are comfortable that it would be spent.

Buying too short a term. A policy that ends while the children are still young, or with years left on the mortgage, can leave the family exposed just when coverage is hardest to buy again.

Never revisiting the number. A new child, a larger home or a pay rise all change the answer.

Frequently asked questions