There are a couple of generally-accepted ways the insurance business helps customers determine how much life insurance they need.
As for what you might be eligible for, the rule of thumb as an individual is that you can get up to 30 times your annual income in life insurance, which is up to $3 million if you are earning $100,000 annually.
One approach is what’s called the Rule of 10, which says the amount of life insurance you need should be 10 times your gross salary. So, if you earn $100,000 annually you would need $1 million in life insurance. This rule of thumb is a good start and works for many people.
Another approach is called the DIME method. It is a simple calculation of the four most important areas that determine life insurance needs:
D – Debt
I – Income replacement (this article)
M – Mortgage expenses
E – Education
We have seen other advice on calculations using your annual income such as multiplying it by the until your youngest child turns 18 years old, although that is probably on the low side based on data of how much longer children are living with their parents.
Another important metric is how long you want insurance to provide income replacement for your survivors.
For the reasons you might guess, we like the DIME method because it provides more specific estimates of need versus broad assumptions based only on income.