Calculating Your Life Insurance Coverage Needs

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Team Waffle
April 13, 2023
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Term Life Insurance For Newbies Course Part 4

If you've ever played the jelly bean guessing game, you know how difficult it can be to get the right number. But figuring out how much life insurance coverage you need doesn't have to be a guessing game. With a little bit of math and some guidance, you can determine the right amount to protect your loved ones.

Hey there, welcome back to Term Life Insurance for Newbies course. In this chapter, we're going to talk about one of the most important questions you need to ask when getting term life insurance: how much coverage do you actually need?

Calculating Your Coverage Needs - Top Factors

So, how do you calculate your coverage needs? There are a few factors you should consider:

Income Replacement

The first factor is income replacement. How much of your income do you want to replace in case you pass away? A common rule of thumb is to aim for 10-12 times your annual income, but it's important to consider your personal situation, such as any outstanding debts or financial obligations.

Debts and Expenses

Speaking of debts and expenses, the second factor to consider is how much debt you have and how much you'll need to cover your expenses. This includes things like mortgages, car loans, credit card debt, and funeral expenses.

Children's Education

The third factor to consider is your children's education. If you have kids, you'll want to consider the cost of their education and how much you'll need to save to cover it.

Future Goals

The fourth and final factor to consider is your future goals. Do you have plans to start a business or purchase a second home? If so, you'll want to factor those goals into your coverage needs.

Life Insurance Calculation Methods

There are a few different methods you can use to calculate your life insurance coverage needs. 

One popular method is called the "income replacement method." You take your income and multiply it by 10 and there you have it.  So, for example, if you make $50,000 a year  then multiply that by 10 years, you would need $500,000 in coverage.

Another method is the "DIME method"! The formula is used to take a more detailed look at your finances and to calculate a more specific number. DIME stands for debt, income, mortgage, and education, the most considered factors when determining your life insurance needs. By adding all these expenses you are able to get a much more accurate read on you and your loved ones needs.

You can also merge these methods to identify coverage needed. Let’s go through an example together!

Calculating Example:

Let's take a look at an example. Say you're a 35-year-old earning $60,000 per year, and you have a mortgage of $200,000 and $10,000 in credit card debt. You also have two kids who will need $30,000 each for college. Finally, you have a goal of starting your own business in the next few years.

So, based on these factors, your coverage needs might look something like this:

  • Income Replacement: 10-12 times your annual income = $600,000-$720,000
  • Debts and Expenses: $200,000 (mortgage) + $10,000 (credit card debt) = $210,000
  • Children's Education: $30,000 (child 1) + $30,000 (child 2) = $60,000
  • Future Goals: $50,000 (starting a business)

Total Coverage Needed: $920,000-$1,040,000

One more option that is WAY easier is using an online coverage calculator to help you determine your coverage needs. These calculators usually ask you several questions about your finances and family situation, and then give you a recommended coverage amount. 

At Waffle, we have a FREE life insurance coverage calculator you can use today! We’ll drop the link in the description below for you to access anytime!


Overall, calculating your coverage needs may seem daunting, but it's an important step to ensure you have enough protection for your loved ones in case something unexpected happens.

Remember to consider your income replacement, debts and expenses, children's education, and future goals when calculating your coverage needs. And as always, speak with a qualified insurance agent to help you navigate the process and find the best policy. Thanks for reading!

Term Life Insurance for Newbies Course