Choosing the Right Coverage Amount—Without Guesswork

Life insurance is one of the most important financial decisions you’ll make, but how much coverage is enough? Too little, and your loved ones could struggle financially. Too much, and you may be overpaying for coverage you don’t need. The key is finding the right balance based on your income, debts, and long-term financial goals.

Factors to Consider When Determining Your Life Insurance Limit

There’s no one-size-fits-all answer to how much life insurance you should carry. The right amount depends on your unique financial situation and future obligations. Here’s how to break it down:

1. Income Replacement: How Much Do Your Loved Ones Need?

If your income supports your family, your life insurance should cover multiple years’ worth of earnings to help them maintain their lifestyle. A common rule of thumb is 10 to 15 times your annual income.

For example, if you earn $75,000 per year, you should consider at least $750,000 to $1.1 million in coverage to replace lost income for your dependents.

How many years is right for you? Most clients calculate this one of two ways: either by the total number of years remaining until they would likely retire, or the total number of years of income replacement to carry based on the age of their youngest child.

For example, if you are 35 years old and expect to retire at 65, you would opt to carry 30 years of coverage. Alternatively, if your youngest child is 4, you may opt to have enough coverage until that child turns 18 and can support themselves. So, you could opt to carry 14 or 15 years of coverage.

At ArcLight Insurance, we consider Term Life Insurance to be a vehicle for income replacement during your working years. These policies come in various “terms” of time. Usually 10, 20 or 30 years of coverage. So, in the second example above, where they calculated 14 to 15 years of coverage until their youngest child reached adulthood, we may recommend a 20 year term policy.

📌 Tip: If you’re the sole provider or have young children, err on the higher end to account for long-term financial needs.

2. Debts & Final Expenses: What Will Need to Be Paid Off?

Your policy should also cover any outstanding debts so that your family isn’t left with financial burdens. Consider:

  • Mortgage balance
  • Car loans
  • Credit card debt
  • Student loans
  • Medical bills
  • Funeral and burial costs (typically $10,000–$15,000)

📌 Tip: If your goal is to keep your family in their current home, ensure your policy covers the full remaining mortgage balance.

3. Future Expenses: Protecting Your Family’s Long-Term Needs

Think beyond immediate financial obligations—life insurance can help fund major future expenses, such as:

  • College tuition for children – Average costs range from $25,000 to $50,000 per year at public universities.
  • Spousal retirement savings – If your partner depends on your income for retirement planning, factor in additional coverage.

📌 Tip: Add at least $100,000 to $200,000 per child if you want to fund their college education.

The DIME Formula: A Quick Calculation Method

The DIME formula helps break down life insurance needs based on four key factors:

Factor What to Calculate Example Amount
D – Debt & Final Expenses Total outstanding debts + funeral costs $250,000
I – Income Replacement Annual income × years needed $75,000 × 10 = $750,000
M – Mortgage Remaining balance on home loan $300,000
E – Education Costs Future tuition for children $200,000

Estimated coverage need: $1.5 million

This method ensures you’re covering all major financial responsibilities your loved ones will face in your absence.

What Type of Life Insurance Should You Get?

  • Term Life Insurance – Best for affordability and temporary coverage (10, 20, or 30 years). Ideal for covering mortgages, income replacement, and child-raising years.
  • Permanent Life Insurance – Includes whole life or universal life, which lasts your lifetime and builds cash value. Best for estate planning, lifelong protection, and supplementing retirement income.

📌 Pro Tip: Many families combine policies—e.g., a 20-year term policy for income replacement and a small whole life policy for lifelong protection.

Get the Right Coverage Without Overpaying

Choosing the right life insurance limit doesn’t have to be overwhelming. By factoring in income, debts, future expenses, and financial goals, you can confidently select a policy that protects your loved ones without unnecessary costs.

At ArcLight Insurance, we help individuals and families customize life insurance policies to fit their needs. Contact us today for a free consultation and let’s ensure you have the right protection in place.