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Life insurance helps ensure that your loved ones are financially supported after you’re gone. To give them the best protection, it's important to figure out how much of it will cover key expenses, such as funeral costs, housing, loan repayment and day-to-day expenses.

This guide will help you understand how much life insurance you should buy, the different policy options available and potential alternatives to purchasing life insurance.

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## What is life insurance?

Life insurance is an agreement made with an insurance company that dictates the amount that the company will pay to your beneficiaries after your death. This is known as your death benefit. A life insurance policy is upheld as long as you consistently pay your life insurance premium.

Life insurance can give you peace of mind that your loved ones will have financial security after you have passed away.

## Calculating how much life insurance you need

There are several methods to determine how much life insurance you really need. The "multiply by 10" and DIME methods are two popular ways to calculate your ideal life insurance policy.

### The "multiply by 10" method

An easy way to calculate how much life insurance you need is the “multiply by 10” method. Simply multiply your current annual salary by 10 to arrive at your suggested amount of life insurance coverage. Say that you earn \$100,000 annually. Using the "multiply by 10" method, you would need \$1,000,000 of life insurance coverage.

This method is ideal for people over the age of 60 who have fewer years left in the workforce. People under 60 may want to multiply their income by a higher factor to account for the number of years left until they retire. Consider multiplying your annual salary by the number of years you have left until retirement. For example, if you are 40, you would multiply your salary by roughly 20 if you expect to retire around 60 years old.

### The DIME method

The DIME method is another way to estimate how much life insurance coverage to buy. It takes four key factors into account to help you determine your life insurance needs: your debt, annual salary, mortgage amount and future education costs for your kids.

To use this method, add together the following:

• All of your outstanding debts
• Your annual salary times the number of years until your youngest child turns 18
• The projected college costs for each of your kids

The sum of all four factors is the amount of life insurance coverage you need according to the DIME method. Compared to the "multiply by 10" method, the DIME method may be more accurate for younger people and those with children.

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## Expenses that you may want your death benefit to cover

Your loved ones can use your death benefit however they choose, but to determine an appropriate life insurance policy amount you'll want to keep in mind the expenses that they will likely have to take on. These may include funeral costs, housing, outstanding debt and college tuition.

### Funeral costs

Funeral expenses can come out of nowhere and put a financial strain on your family members while they’re grieving. To prevent this, one option is to make sure your life insurance policy will cover at least the costs of your burial and funeral. Keep in mind that the median cost of a funeral is \$7,848. Most life insurance policies will offer enough coverage to fully pay for these expenses.

### Mortgage and housing expenses

Mortgage and housing expenses are often the largest ones in your household budget. You may want your death benefit to cover these expenses to reduce the financial stress your loved ones may experience after you're gone.

To account for these expenses in your life insurance coverage, determine the amount left on your mortgage or the amount you expect your family to pay in rent for a span of time after your death. This is the amount of life insurance you would need to cover your family’s mortgage and housing expenses in the event of your death.

### Income replacement

For working-age individuals, income replacement is often the main purpose of life insurance. Your death benefit needs to be enough to cover your annual income — plus some extra to protect against inflation — if used as an income replacement.

For instance, say you earn \$50,000 per year and want to replace your income for 15 years after your death. In that case, you would need at least \$750,000 worth of life insurance coverage. To cover inflation in this example, you may want a policy worth \$800,000 or more.

### Outstanding debt

Some people use life insurance to pay off outstanding debts so that their families don't have to take on that financial burden. These debts may include credit cards and personal, student or car loans. If you have debt, you may want your life insurance policy to include enough coverage to pay it off in full.

For example, if you have \$30,000 remaining on your student loan and a \$120,000 mortgage, you would want to purchase at least \$150,000 worth of life insurance coverage. Make sure to account for the interest payments on your loans, as well.

### College tuition

You can also purchase life insurance with the intent to cover college tuition for your children. College costs can add up quickly: in 2022, the average cost of a college education in the U.S. was \$35,551 per year.

Anticipating future college costs is tricky, especially if your children are many years away from going to an institution for higher education. A safe estimate is somewhere between \$100,000 and \$150,000 per child. Multiply this by the number of children you currently have or expect to have to get the amount of life insurance you’ll need to cover their college tuition.

## Different types of life insurance

Life insurance companies offer two types of life insurance — whole life insurance and term life insurance.

### Whole life insurance

Whole life insurance is a form of permanent life insurance that’s designed to last for the rest of your life. As long as you continue paying your premiums, your whole life insurance company will pay your death benefit to your beneficiaries, regardless of when you die.

How much is whole life insurance? Annual premiums for a whole life insurance policy will stay the same forever and depend on the amount of coverage you select as well as your age and gender. For example, for \$250,000 worth of whole life coverage, a healthy 40-year-old would pay around \$15 per month on average while a healthy 60-year-old would pay around \$65 per month.

Since whole life insurance policies are a lifelong commitment, make sure your premiums are comfortably affordable now and in the future. A missed premium payment could cause your policy to lapse.

A unique quality of whole life insurance policies is their cash value component. Your plan will accumulate a cash value that grows on a tax-deferred basis. While you’re still alive, you can withdraw this value or borrow against it, making whole life insurance a flexible financial tool.

You might do this to pay off loans or cover unexpected medical bills, for example. Withdrawals from the policy — up to the amount you have paid in premiums — are not subject to income tax, but they will reduce the death benefit your loved ones receive upon your death.

### Term life insurance

Unlike whole life insurance, term life insurance only lasts for a set period — the term of the policy. If you die during that term, the insurance company will pay the death benefit to your loved ones. Most term life insurance providers offer terms of 10, 15, 20, 25 and 30 years. You may find some 35- and 40-year policies, but these are less common.

Because term life insurance is temporary, it’s less expensive than permanent plans like whole life insurance. If you’re not confident that you can afford whole life insurance coverage, a term policy is a simple and effective way to obtain basic financial protection for your family. On average, whole life insurance policies cost 5 to 15 times more than term life insurance policies.

A term policy can be a great option for people looking for affordable life insurance coverage over a specific time period. For example, you might choose a term policy that will cover the period until your children graduate high school or you pay off your mortgage.

### No-exam life insurance

Some whole life insurance plans require you to undergo a medical exam as part of the application process. However, you can speed up this process by opting for a no-exam life insurance policy, which offers coverage without requiring a medical exam. Most insurance companies offer both term life and whole life no-exam insurance policies.

The trade-off with no-exam life insurance is that coverage on these plans is generally much lower than comparable plans that require a medical exam. If you think you might not be approved for life insurance based on your answers to health questions or the results of a medical exam, no-exam life insurance might be the best option for life insurance coverage.

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## How much does life insurance cost?

The cost of life insurance varies significantly from one plan to another depending on factors like the insurance company you choose, your age and the amount of coverage you purchase.

Life insurance for seniors is generally much more expensive than life insurance in your 20s, all else being equal. Men also typically pay more for life insurance than women for similar plans. Consider asking for life insurance quotes from several companies so that you can compare prices and choose the most cost-effective plan.

## Other means of supporting your family after you're gone

Life insurance isn’t the only way to support your family after your death. Alternatives to life insurance include:

### Savings accounts

Self-funding or self-insurance with savings accounts can help you provide for your family after you’re gone. The drawback of using a savings account as an alternative to life insurance is that there are no rules about when or how you can use the money in the account. You may be tempted to dip into the funds during your life, reducing the amount available to your family later.

If you have a savings account, the "multiply by 10" or DIME method can help you determine how much money you should keep in that account. Keep in mind that money sitting in a savings account won’t earn much interest. Also, you should avoid depositing more than \$250,000 at any given bank, as this is the maximum amount the Federal Deposit Insurance Corporation (FDIC) insures per depositor, per insured bank.

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### Investment and retirement accounts

Using investment and retirement accounts is another option for making sure your family has sufficient financial resources in the event of your death. If you set aside money every year and invest it well, your investment accounts can cover your family’s expenses. The younger you start investing, the more funds your family will have access to later. Pursuing this option requires discipline and the commitment to invest regularly.

One negative of relying on investment and retirement accounts to support your family is that a turn in the market could greatly reduce the amount available to them at any given moment. If you pass away during a downswing in the market and your family needs to cash out some of your investments, they could lose money.

### Assets

If you have significant assets such as real estate, vehicles or business interests, those assets can financially support your family after you’re gone. Make sure to keep a detailed list of all your assets so your family knows what you have and what everything is worth. If your family has expenses they can’t cover down the line, selling one or more of those assets can provide them the funds they need.