How Much Life Insurance do you Really Need?

By Chika


Last Updated: September 1, 2021


Death is a topic most prefer to avoid, let alone confront. But as sure as the rising of the sun, death is inevitable. The financial impact that comes with death can be devastating to our loved ones and dependents, with ripple effects which could severely alter the course of their lives. One way through which we can secure a comfortable lifestyle for our loved ones and dependents upon our demise is by taking out a life insurance policy.

A life insurance policy is a contract that transfers the financial risk of one’s death to a life insurance company. In exchange for premium payments, the insurance company agrees to pay a lump-sum payment to beneficiaries upon death. This is essentially a guarantee that the   dependents of the policyholder will be taken care of when (s)he is dead.

There are several factors which are used to determine the value of one’s life insurance. This allows the policyholder and insurance company to estimate what amount to pay monthly as a life insurance premium.  Just the way no two lives are the same, no two life insurance policies are exactly the same. The combination of these factors enables insurers to evaluate the risk level of one’s life and place a ‘value’ on it.  These factors are outlined below.


Factors that determine life insurance premium

Age: Age is the most critical factor in determining the cost of a life insurance policy. This is because age is used to judge life expectancy. The older one gets, the more life insurance premium he is expected to pay because it is assumed that older people are closer to the grave than younger people.  


Health status: Health, they say, is wealth, and at no other time is this proven beyond any reasonable doubt than when calculating life insurance. People in good health pay less than those that have health complications such as diabetes or high blood pressure. If you have a poor health condition, this increases your risk, which ultimately implies you would have to pay more to have your life insured. In the same vein, if you have a good health condition, this reduces your risk and inevitably your premium payments because the propensity of dying due to health reasons is lower. Risk factors which can affect one’s health status include family history, medical history or bodyweight.


Smoking: This comes with so many health issues such as heart disease, stroke, and lung disease. This makes insurance companies consider smokers as high-risk clients. A smoker is expected to pay more premiums than a non-smoker. For example, a 30-year old non-smoking male looking to take out $1,000,000 in coverage for 30 years may be required to pay $98 every month. In contrast, a 30-year old smoking male may be required to pay as much as $270 every month. As such, smoking doesn’t only cost you your health, but also costs you money.


Occupation and hobbies:  Since we spend most of our life at work, it defines our lives and the types of risk we are exposed to, which directly impacts your life insurance premiums. People in dangerous occupations such as coal mining, manual laborers, security personnel or manual laborers are exposed to more risk than the average citizen with low-risk jobs such as teaching or working in an office. As such, they would more likely pay more for a life insurance policy. If you also engage in dangerous hobbies such as rope walking, mountain climbing, skydiving or extreme sports, expect to pay a higher life insurance premium. 


Gender: Gender also plays a huge part in determining a life insurance policy. It is no news that women, on average, live longer than men by six to eight years. This is attributed to behavioral differences between both sexes. Secondly, men, by nature, tend to take on more risky ventures than women. As a result,  life insurance premiums for women are priced lower than those for men.


Coverage level and term: The more coverage and length you seek, the higher your life insurance premium.  


Estimating How Much Life Insurance is Needed

It can be quite tricky figuring out exactly how much life insurance you should buy down to the last cent. In order to have a close estimate, you have to consider your current financial situation and imagine what your beneficiaries would need in the coming years. Would they want to go to college, start a business or learn a skill? Such questions are vital because they enable you consider other factors which can affect the life of your dependents other than monetary costs. The unspoken rule when it comes to life insurance is hinged on the assumption that it is better to overestimate than under-estimate. That way, you can be sure that your beneficiaries are adequately covered.

The general way of estimating how much life insurance you need is by subtracting your assets from your long-term financial obligations. The remainder is the gap that your life insurance will have to fill. However, there are four methods which can be used as a guide to estimate how much life insurance you would need.  Let’s take a look! 


Method 1: Multiply income by 10 or 15.

One way to get a rough estimation of how much life insurance you would need to buy is by multiplying your gross income by 10 or 15.  This method, though not bad, seems to be crude in comparison to the present economy and interest rates. The “income x 10” rule fails to take a detailed look at one’s family’s needs, nor does it take into account one’s savings or existing life insurance policies. If your partner is a stay-at-home parent, it would be difficult providing a coverage amount for them using this method. This can be quite problematic considering the fact that stay-at-home parents add value which can’t be estimated in monetary terms. For example, if your partner dies, you would have to pay someone for the service that your partner rendered for free. One way to get around this is using the going rate for childcare providers to provide an estimated value for your stay-at-home partner. 


Method 2: Multiply income by 10 or 15 (+$100,000)

This is an advanced model of the first method. Some financial planners recommend adding $100,000 to that amount to cater for college education expenses, which seems to be on a continuous rise. In addition to this, student loans are causing millennials to postpone achieving their life milestones. A lot of millennials are forgoing marriage, buying cars or moving into their own house because of the burden that comes with student loan. You definitely do not want your kids to have their aspirations thwarted due to burdensome student loans. However, this method, like the first, doesn’t take an in-depth look at all of your family’s needs. It also does not factor-in your assets, savings or any life insurance coverage you already have in place. 


Method 3: The DIME formula

DIME is an acronym that stands for Debt, Income, Mortgage and Education. This method takes a more detailed look at my finances than the first two methods, which are just mere estimations. The DIME formula allows you to focus on these four critical areas when calculating your life insurance needs. Suffice it to mention that these are also the four areas insurance companies evaluate to determine your risk level and hence your life insurance premiums.

  • Debt: Add up your existing debts, including an estimate of your funeral expenses.
  • Income: This is your annual income multiplied by the number of years your dependents would need financial support.
  • Mortgage: This is the remaining amount needed to pay off your mortgage.
  • Education: This is the estimated future cost of sending your kids to school and college.

By adding all of these obligations together and subtracting them from your liquid assets, you would have a more comprehensive view of how much life insurance you would need. 


Method 4: Use a Life Insurance calculator

If you don’t want to go through the hassle that comes with manual calculation, you can use a life insurance calculator. By just answering a few questions, you can get a picture of how much life insurance I would need to buy.



You may need less life insurance if:

  • You have existing life insurance.
  • You are single – the fewer dependents you have, the lower the coverage you would need.  

You may need more life insurance if:

  • You have elderly parents who need to be taken care of. Such costs could be in the form of payments for assisted living or in-home care.
  • You want to leave a legacy gift to a cause or charity.



Taking a life insurance policy implies that you are mindful of the condition of your dependents after you move to the great beyond. However, figuring out how much life insurance you would need can be quite daunting. Though it is good to strive for a better life today, your legacy lies in what you leave behind for your dependents tomorrow. As such, it is important that you take appropriate steps to ensure that your dependents are well taken care of after you have passed away.


Photo by Esther Ann on Unsplash


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