Ask ten people how much life insurance they carry and most will give you a round number — $250,000, $500,000, $1 million — usually chosen because it sounded like a lot, not because it matched anything about their actual finances. That's a coin flip disguised as a decision.
The income-replacement method
The most widely used approach starts with a simple question: if your income disappeared tomorrow, what would it take to keep your household financially stable for a defined stretch of time? A common starting formula:
- Income replacement: annual income × 5–10 years, depending on how long dependents would need support
- Debt payoff: mortgage balance plus other outstanding debt
- Future costs: a rough figure for things like a child's education (often $40,000–$60,000 per child)
- Minus existing coverage: subtract savings, existing life insurance, and any employer-provided coverage
Add the first three and subtract the fourth, and you get a defensible coverage target — not a guess.
Why "10x income" alone isn't enough
A popular rule of thumb says to carry 10 times your income in life insurance. It's a reasonable starting point, but it ignores two things that swing the real number significantly: how much debt you're carrying, and how many years of support your dependents actually need. A single 28-year-old with no kids and no mortgage needs a very different number than a 40-year-old with three kids and 22 years left on a mortgage — even at identical incomes.
What most people get wrong
The most common mistake isn't buying too little coverage — it's relying entirely on employer-provided group life insurance, which is often capped at 1–2x salary and disappears the moment you leave the job. If that's your only coverage, run the math above and see how far short it actually falls.
Term or whole life for this number?
For most income-replacement needs, term life insurance is the more efficient tool — it's built specifically to cover a defined period (like the years until a mortgage is paid off or kids are grown) at a much lower premium than permanent coverage. Permanent policies serve a different purpose (estate planning, lifelong dependents, cash value accumulation) and are usually a separate decision, not a substitute for basic income replacement.
Recalculate after every major life change
A life insurance number isn't set-and-forget. A new child, a new mortgage, a paid-off debt, or a significant income change should all trigger a quick recheck — the gap between "what you have" and "what you need" moves every time your finances do.