Life Insurance Income Multiple: Where the Rule of Thumb Fails

There is no single rule

"Buy ten times your income" is the version people repeat, but the sources do not agree on it. The National Association of Insurance Commissioners (NAIC) says some experts suggest five to eight times your current income, and then tells readers to work through their own income, dependents, education costs, debts and final expenses for a more accurate amount. United Policyholders, a consumer group, described a multiple of seven to ten times annual income as an industry standard in a 2014 article, and in the same piece a fee-only adviser asked how one figure could suit families that differ in "the same number whether you have one child or 10". Haven Life's guide gives five to ten times pre-tax income and says it is a starting range, not a precise answer.

So the "10x rule" is really the top of a family of rules. None of them says where the multiple comes from or who it fits, and that is the real weakness.

Three households, same multiple, very different needs

The households below are invented for this post. For each, ten times income is compared with a figure built line by line, using the same sum as our life insurance coverage estimate: income for the years it is needed, plus debts, education and final expenses, minus what the household already has.

The rule fails in both directions. Household A would be about $710,000 short, because fifteen years of income and a large mortgage dwarf a flat multiple. Households B and C would be buying far more than their sums support. In C the children are independent and the mortgage is paid, so the family's dependence on that income has mostly run out.

What a multiple cannot see

How long the income is needed

Ten times income works out to ten years of income, whatever your situation. Household A needs fifteen years and C needs three. The number of years is the biggest swing factor in any income-replacement sum, and a multiple hides it.

What you owe

A $320,000 mortgage and a paid-off home both produce the same "10x" figure when incomes match. The family's position is completely different.

What you already have

Savings, a partner's income and existing policies reduce the need. Group cover from an employer counts only while you keep the job, so treat it with care.

Who relies on you

A multiple has no field for dependents. It gives one child and ten children the same answer, which is the objection raised by the adviser United Policyholders quoted.

A better way to use the rule

1. Work out the number of years from a real date, such as the year your youngest child turns 18 or the year your mortgage ends.
2. Add income for those years, then debts, then any education or final-expense goals.
3. Subtract the cover and savings you already have.
4. Compare the result with five-to-ten times your income. If the two are far apart, look for the input that explains it, usually the years or the debts. That difference is useful information, not an error.

Our methods for sums like this are set out on how our calculators work.

Common questions