The rules of thumb — ten times income, twelve times income — are starting points that ignore everything that actually decides the answer. A household with no mortgage and grown children has a completely different need from one with a new thirty-year mortgage and a toddler, on identical salaries.
Here is the arithmetic that replaces the rule of thumb. It takes about five minutes.
Step one: add up the obligations
- Outstanding mortgage balance
- Other debts — cars, cards, personal loans, any business guarantee
- Education — the realistic cost of getting each child through
- Final expenses — funeral and estate settlement, commonly budgeted around $15,000
- Income replacement — the years of household income you would want replaced, at the percentage the household would genuinely need
On that last one: households usually need somewhat less than 100 percent, because one person’s costs come out of the budget. Around 70 percent is a common working figure.
Step two: subtract what already exists
- Existing life insurance, including group cover through work
- Liquid savings and investments genuinely available to your family
Step three: the difference is your gap
That is the number worth quoting. The life insurance needs calculator runs it in your browser — nothing is sent anywhere.
Two adjustments most people should make
Discount your group coverage. Employer life insurance is typically one or two times salary, and it almost always ends when the job does — frequently at the exact moment your health makes individual coverage expensive. Run the number again with group cover set to zero and see whether the picture still looks comfortable.
Do not forget the non-earning partner. A household where one person stays home is not a household with one insurable life. Replacing childcare, household management and everything else that person does is a real and substantial cost, and it is the most commonly skipped line in the whole exercise.
What the number does not tell you
The calculation sizes the benefit. It does not choose the product, and it deliberately leaves out several things:
- It does not adjust for inflation over the replacement period
- It assumes the death benefit is not invested
- It ignores survivor Social Security benefits, which can be significant for a household with children
- It does not consider estate tax, business succession or special-needs planning
So treat it as the opening position for a conversation, not a final answer.
Matching the number to a product
Temporary obligations point to term. Certainties point to permanent.
A gap driven by a mortgage and school-age children is temporary — it shrinks every year and eventually disappears. Term life covers exactly that shape at the lowest cost per dollar of death benefit.
A gap driven by final expenses, estate liquidity or a lifelong dependant is a certainty. That is what permanent insurance is for.
Many households sensibly hold both, sized differently.
Choosing the term length
Match the term to the obligation:
| Situation | Sensible term |
|---|---|
| New 30-year mortgage | 30 years |
| 15 years left on a mortgage | 15 or 20 years |
| Newborn child | 20–25 years |
| Teenagers at home | 10–15 years |
| Business loan with personal guarantee | Length of the loan |
If two obligations have different horizons, laddering is often cheaper than one long policy for the whole amount — a larger 15-year policy stacked on a smaller 30-year one. As each obligation ends, that layer of premium ends with it.
The clause worth more than the price
Ask about the conversion rider: the right to convert some or all of a term policy into permanent coverage with the same carrier, without new medical underwriting.
At purchase it costs little or nothing. If your health changes, it becomes the most valuable provision in the contract. Check three things: how long it lasts (some cut off long before the term does), what you can convert into, and whether partial conversion is allowed.
Get it quoted properly
A life insurance review is free and takes about half an hour: the needs calculation, an audit of what you already hold, quotes across multiple carriers, and a plain explanation of what each product costs over time.
If you have a health condition, say so early — carriers underwrite conditions very differently, and the first application should go to the one most likely to say yes.
More depth in term vs whole life vs IUL.
Frequently asked questions
Should I count my life insurance at work?
Include it, but discount it mentally. Group life is typically one or two times salary and almost always ends when the job does — often at exactly the moment individual coverage becomes expensive. Treat it as a supplement to a policy you own, not as your plan.
How many years of income should I replace?
A common approach is to cover the years until your youngest child is independent, or until the surviving partner reaches retirement age. There is no universal right answer, which is why the calculation should let you change the number and see what it does.
Does a large number mean I need permanent insurance?
Usually the opposite. A large gap driven by a mortgage and children is a temporary need, and term life buys the most coverage per dollar for a defined period.