Start with your debts and dependents, not a rule of thumb

The amount of term life insurance you need depends on what your family would have to pay if you died today — not on a multiple of your salary or a number you read online. A common starting point is to add up your mortgage balance, car loans, credit card debt, and any other money you owe. Then add the cost of raising your children until they finish school or college, plus funeral expenses (typically $7,000 to $12,000, though this varies by region and your choices). That total is closer to what you actually need than any percentage formula.

The reason formulas fail is that they ignore your real situation. A 35-year-old with a $300,000 mortgage, two young children, and a spouse who does not work outside the home needs far more coverage than a 45-year-old with no dependents and a paid-off house, even if both earn the same salary. Your job is to think through what your family would actually face without your income.

Key Takeaways

  • Add your outstanding debts (mortgage, car loans, credit cards) plus the cost of raising dependents to school age or college to find a realistic coverage amount.
  • Include funeral and burial costs, which typically range from $7,000 to $12,000 depending on your location and choices.
  • Account for lost income your family would need to replace — many people underestimate how many years they need that income replaced.
  • Term life insurance is much cheaper than permanent insurance at the same coverage level, so you can often afford more protection for the same monthly cost.
  • Your coverage needs change over time, so revisit this calculation when you have a major life change like a new child, a home purchase, or a job loss.

The debt and dependent method

Write down every debt you carry: your mortgage balance (not your monthly payment), car loans, student loans, credit cards, and any personal loans. This is the money your family would still owe if you died. Next, estimate the cost of raising each dependent. This includes food, housing, education, and childcare until they reach adulthood or finish college. If you have young children, this number is often larger than people expect — some estimates run $15,000 to $20,000 per year per child, though this varies widely by location and your family's spending.

Add funeral and burial costs. If you plan a traditional funeral with viewing, casket, and burial, expect $8,000 to $12,000 in most areas. Cremation is typically $1,000 to $3,000. If you have no preference, use $10,000 as a placeholder. Finally, add a buffer for unexpected expenses — job loss, medical bills, or the time your spouse needs to adjust before returning to work. A common approach is to add six months to one year of your household's current expenses.

The sum of these numbers is your baseline coverage need. If the total is $450,000, a $500,000 term policy gives you a cushion. If it is $850,000, you might look at a $1,000,000 policy. You do not need to match the number exactly — term life insurance comes in standard amounts, and going slightly over is normal.

How to account for lost income

Beyond debts and when ready costs, your family loses your income. If you earn $60,000 per year and your children will need support for another 15 years, that is $900,000 in lost wages (before accounting for inflation or raises). Many people underestimate this number because they think only about the next few years, not the full span until their children are independent.

A practical way to think about this: how many years of your household expenses does your family need to replace? If your household spends $80,000 per year and you want to replace 10 years of that income, you need $800,000 in coverage. If your spouse works and earns $40,000 per year, you might reduce that to 7 years of your salary only, since your spouse's income continues. The point is to be intentional about the time frame, not to guess.

If you have a pension or your employer offers a death benefit, subtract that from your total. Some employers pay one to two years of salary as a death benefit, which reduces the coverage you need to buy yourself. Check your employee handbook or ask your HR department what your family would receive.

Why coverage needs change over time

The amount you need today is not the amount you need in 10 years. As you pay down your mortgage, your debt shrinks. As your children grow older, the years you need to replace their living expenses shrink. As you build savings and investments, your family has more resources to fall back on. This is why term life insurance works well — you buy coverage for a specific period (10, 20, or 30 years) when your needs are highest, and the cost is locked in for that entire term.

Major life events should trigger a recalculation. When you have a new child, your coverage needs jump. When you pay off your mortgage, they drop. When you lose a job or your spouse's income changes, the math shifts. When your youngest child turns 18 or finishes college, you may need less coverage. Some people buy multiple term policies at different times to match these changing needs — for example, a 30-year policy when they buy a house and a 20-year policy when their second child is born.

Common mistakes in calculating coverage

The biggest mistake is using a salary multiple without thinking about your actual situation. You might read that you need "10 times your salary" in coverage, but if you earn $100,000 and have no dependents, $1,000,000 in coverage is overkill. Conversely, if you earn $60,000 and have three young children and a $400,000 mortgage, 10 times your salary ($600,000) may not be enough.

Another common error is forgetting to include debts. People often think only about replacing income and overlook that their family would inherit the mortgage, car loans, and credit card balances. If you have $150,000 in debts and you calculate coverage based only on income replacement, you are leaving your family short.

A third mistake is overestimating what your family will spend. Some people add up their current household budget and assume it stays the same forever, but if you died, some expenses would drop — your commute, your work clothes, your portion of food and utilities. A reasonable estimate is 70 to 80 percent of your current spending, not 100 percent. That said, it is better to overestimate slightly than to leave your family underprotected.

How term length affects your total cost

Once you know how much coverage you need, you have to choose how long you need it. A 20-year term is cheaper per month than a 30-year term for the same coverage amount, but it expires sooner. A 10-year term is the cheapest, but you may still have young children when it ends. The right choice depends on when your coverage needs will drop.

If you have a 5-year-old child and a 30-year mortgage, a 20-year term covers you until your child is 25 and your mortgage is nearly paid off — a reasonable endpoint. If you have a newborn, a 30-year term takes you to when your child is 30, which may be longer than you need. Some people buy a 20-year term now and plan to reassess in 20 years when their situation has changed. Others buy a 30-year term for the peace of mind that they are covered no matter what happens.

The monthly cost difference is real. A healthy 35-year-old might pay $25 per month for a $500,000 20-year term but $35 per month for a $500,000 30-year term. Over 20 years, that is a $2,400 difference. Over 30 years, the 30-year term costs more overall, but you have coverage for 10 additional years. Run quotes for different term lengths and see what fits your budget and your timeline.

When to revisit your coverage amount

You do not need to recalculate every year, but certain events should prompt a review. When you have a new child, add the cost of raising that child to your coverage need. When you pay off a major debt like a car loan or credit card, you can reduce your coverage slightly. When you receive an inheritance or build significant savings, your family has more resources, so you may need less insurance. When your income rises substantially, you might increase coverage to match the higher standard of living your family has become used to.

If you bought a term policy 10 years ago and your situation has changed dramatically — you have had more children, bought a second property, or your spouse left the workforce — it is worth running the numbers again. You may find you need more coverage, or you may find that your original calculation was conservative and you are already well protected. Either way, you will know rather than guess.

Frequently Asked Questions

What if I cannot afford the coverage amount I calculated?

Buy what you can afford now and plan to increase it later. A $300,000 policy is better than no policy. You can also choose a longer term length (like 30 years instead of 20) to lower the monthly cost, or you can buy a smaller policy now and add more coverage when your income rises or your budget allows.

Should I include my spouse's income in my calculation?

Only if your spouse would stop working if you died. If your spouse works and would continue working, their income helps support the family, so you do not need to replace it dollar-for-dollar. You might reduce your coverage need by half your spouse's salary to account for the fact that they would be the sole earner. If your spouse stays home with children, include the cost of childcare they currently provide, since your family would need to pay for that.

Is it better to buy one large policy or multiple smaller policies?

One policy is simpler and usually cheaper. Multiple policies can make sense if your needs are very different at different times — for example, a 30-year policy to cover your mortgage and a 20-year policy to cover your children's education. But for most people, one term policy that covers your total need is the easiest approach.

What if my employer offers life insurance — do I still need to buy my own?

Employer coverage is usually one to two times your salary, which is rarely enough to cover your actual needs. It is also tied to your job, so if you leave or lose that job, the coverage ends. Buying your own term policy gives you permanent protection that is not dependent on employment. You can use employer coverage as part of your total protection, but it should not be your only source.

How often do I need to update my coverage amount?

Revisit your calculation when you have a major life change — a new child, a home purchase, a significant raise, or a major debt payoff. You do not need to recalculate every year. Many people review their coverage every five years or when their circumstances shift noticeably.