It’s hard to pinpoint how much life insurance you should buy down to the penny, but you can make a good estimate by using our life insurance calculator below.
In general, you should add up your long-term financial obligations, such as mortgage payments or college fees, and then subtract your assets. The remainder is the gap that life insurance will have to fill.
This life insurance calculator uses your existing assets and debts to figure out how much life insurance coverage you need. If you need help figuring out your assets and debts, there are additional calculators to help you calculate those values.
Term vs. whole life insurance calculator
Term life insurance lasts for a set period of time, such as 10, 20 or 30 years. So, when calculating coverage, think about how long you want your term policy to last. For example, if you need life insurance to cover your income until your kids go to college, you may need a 20-year policy. Alternatively, if you want to cover your mortgage, you may need a 30-year term policy.
Whole life insurance can last your entire life, so you’ll want to take into account final expenses, such as burial costs. Your insurance needs may change over your lifetime, so consider any future plans like buying a house or having a family.
Use the calculator below to determine which type of coverage is best for you.
» MORE: Term vs. whole life insurance: Differences, pros and cons
More life insurance calculators: Debt and income replacement
Use the life insurance calculators below to get a sense of how much coverage you’d need to replace your current salary and any debts you’re carrying.
How to manually calculate how much life insurance you need
Follow this general philosophy to find your own target coverage amount: financial obligations minus liquid assets.
Step 1: Add up the following items to calculate your financial obligations.
Your annual salary multiplied by the number of years you want to replace that income.
Your mortgage balance.
Any other debts.
Any future needs such as college fees and funeral costs.
The cost to replace services that a stay-at-home parent provides, such as child care, if applicable.
Step 2: From that total, subtract liquid assets, such as savings, as well as existing college funds and current life insurance policies. The number you’re left with is the amount of life insurance you need.
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Life Insurance illustration of mother with young child
4 ways to estimate how much life insurance you need
If you want to quickly determine your existing life insurance needs, an estimate can be an easy way to get a value. These methods are better than a random guess but often fail to account for important parts of your financial life.
Use the life insurance calculators above to get a more refined idea of how much coverage you need, and then compare that value to these estimates.
- Multiply your income by 10
The “10 times income” guideline is often shared online, but it doesn’t take a detailed look at your family’s needs, nor does it take into account your savings or existing life insurance policies. And it doesn’t provide a coverage amount for stay-at-home parents, who should have coverage even if they don’t make an income.
The value of a stay-at-home parent’s work needs to be replaced if he or she dies. At a bare minimum, the remaining parent would have to pay someone to provide the services, such as child care, that the stay-at-home parent provided for free.
- Buy 10 times your income, plus $100,000 per child for college expenses
This formula adds another layer to the “10 times income” rule by including additional coverage for your child’s education. College and other education expenses are an important component of your life insurance calculation if you have kids. However, this method still doesn’t take a deep look at all of your family’s needs, assets or any life insurance coverage already in place. - Use the DIME formula
This formula encourages you to take a more detailed look at your finances than the other two. DIME stands for debt, income, mortgage and education, four areas that you should account for when calculating your life insurance needs.
Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
Income: Decide for how many years your family would need support, and multiply your annual income by that number.
Mortgage: Calculate the amount you need to pay off your mortgage.
Education: Estimate the cost of sending your kids to school and college.
By adding all of these obligations together, you get a much more well-rounded view of your needs. However, while this formula is more comprehensive, it doesn’t account for the life insurance coverage and savings you already have. It also doesn’t consider the unpaid contributions a stay-at-home parent makes.
- Replace your income, plus add a cushion
With this method, you’ll buy enough coverage that your beneficiaries can replace your income without spending the payout itself. Instead, they can save or invest the lump sum and use the resulting income to pay expenses.
To calculate the amount, divide your annual income by a conservative rate of return, such as 4% or 5%. As an example, let’s assume your income is $50,000 and you estimate a 5% rate of return. The math works like this: $50,000 divided by 5% equals $1 million. So if you buy a million-dollar life insurance policy and your beneficiaries put the payout into a bank account earning 5% annual interest, they can expect to generate $50,000 a year to replace your income.
When your dependents no longer need the income to meet daily living expenses, the $1 million can go toward other goals such as college tuition, home buying or retirement income.
To use this method for a stay-at-home parent, first add up how much it would cost each year to pay someone else to handle that parent’s tasks. Then plug that number into the formula as if it were the stay-at-home parent’s annual income.
» MORE: Who needs life insurance?
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Tips for calculating how much life insurance you need
Keep these tips in mind as you calculate your coverage needs:
Think of life insurance as part of your overall financial plan. That plan should take into account future expenses, such as college costs, and the future growth of your income or assets.
Don’t skimp. Your income likely will rise over the years, and so will your expenses. While you can’t anticipate exactly how much either of these will increase, a cushion helps make sure your spouse and kids can maintain their lifestyle.
Talk the numbers through with your family. How much money does your spouse think the family would need to carry on without you? Do your estimates make sense to them? For example, would your family need to replace your full income or just a portion?
Consider buying multiple, smaller life insurance policies. You can buy more than one life insurance policy to vary your coverage as your needs ebb and flow. For instance, you could buy a 30-year term life insurance policy to cover your spouse until your retirement and a 20-year term policy to cover your children until they graduate from college. Compare life insurance quotes to estimate your costs.
Understanding life insurance
Why you need life insurance
The primary reason we buy life insurance is for protection — it can provide financial back-up during emergencies when we pass on or become totally and permanently disabled.
Some life insurance products bundle insurance with an investment component and can be used to provide for your retirement income or to accumulate savings to leave behind for your loved ones. These will cost more.
A life insurance policy is a contract between you and an insurance company. In return for the benefits provided by your policy, you pay a premium for an agreed duration.
There are 2 main categories of products:
Term insurance – Sometimes called unbundled products as they provide you with protection coverage for a fixed period of time without any investment feature.
Bundled products – Refers to whole life and endowment policies as well as investment-linked policies (ILPs) as these provide for protection and investment.
Assessing how much insurance to buy
Buying a life insurance policy is a long-term commitment. It takes time to assess what you need and what you can afford.
Start by assessing how much insurance protection to buy. If you are also looking to invest for a financial goal, you need to assess how much savings to build and the time you have to achieve this (your investment horizon).
Your protection needs
Your savings and investment goals
Affordability
Note
It is important to know if you are buying life insurance for protection alone or to build savings too, how much to buy, and what you can afford. You will be guided through this process if you deal with and seek advice from a financial advisory (FA) representative. Direct purchase insurance products are available at lower cost, if you are prepared to do this on your own.
Tips
Think about your needs, personal circumstances, and the suitability of the product recommended to you. Make sure the product you buy meets your protection needs first. Read the documents given to you carefully.
If all you need is protection coverage, buy term insurance.
If you are looking to invest as well and are considering a bundled product, do compare the features and risks with other similar products. Use online portal compareFirst to help you do this. Ask your FA representative to take you through the bundled product disclosure document (if available) or to help you make this comparison.
Alternatively, you can consider buying term insurance for protection coverage and investing your money in other investment products.
Do consider direct purchase insurance if you are comfortable buying life insurance without financial advice
Do not feel obligated to sign up right away. If you are unsure, talk to your FA representative and ask more questions about the products recommended as well as the options available to you.
Note
Remember, you have a free-look period of 14 days from the date you receive the policy document. Review the policy to be sure that you want to keep it. If not, exercise the free-look cancellation.
Before you buy
Before you purchase an insurance product, here are a few things you should do:
Give all the required information
Make sure you understand the product
Be cautious
How much will you be paying?
The premium you pay depends on the protection coverage, the financial returns you want, or a combination of both. Take time to think about what you can afford when deciding on the type of product and the amount of coverage to buy.
You should also factor in the commitment period and whether your existing savings can withstand any unforeseen financial emergencies.
Your responsibility
Always check the statements and read the letters sent to you by your insurance company. If there’s anything you don’t understand, immediately ask your FA representative or insurance company about it.
Policy Owners’ Protection (PPF)
Are you aware that in Singapore, there is actually protection for your insurance policies? The PPF Scheme protects all life insurance policies issued by licensed life insurers who are PPF Scheme members. Examples of life policies covered by the scheme are:
Individual and group term life policies.
Individual and group whole life policies.
Individual and group endowment policies.
Individual and group annuities.
Individual and group long-term accident and health (A&H) policies.
Accumulated values of coupon deposits, advance premium payments and unclaimed moneys under all insured policies are also covered. The PPF Scheme, however, does not cover policies issued by overseas branches of a registered life insurer incorporated in Singapore. Singapore Deposit Insurance Corporation (SDIC) provides protection for guaranteed benefits of life insurance policies, subject to applicable limits.
For example, individual life and voluntary group life policies, there is a limit of S$500,000 for the guaranteed sum assured and S$100,000 for the guaranteed surrender value per life assured per insurer. What does “per life assured per insurer” mean? If you have several life insurance policies with an insurance company, the limits will apply on the total combined benefits of your insurance policies and not individually.
For individual and voluntary group annuities, there is also a limit of S$100,000 for the aggregated commuted value of guaranteed benefits per life assured per insurer. However, policy owners making claims under accident and health (A&H) policies will be fully compensated
