Using Life Insurance to Replace Your Lost Income

If you die, the people who count on your paycheck could face real financial strain. Life insurance exists precisely to soften that blow.

Naming life insurance as a way to replace your income gives your beneficiaries money to keep paying the bills once you're gone, and it can ease your own mind right now. Close to a third of Americans who own a policy say replacing lost income was their main reason for buying it, according to a survey fielded online by The Harris Poll.

Below, we walk through how income-replacement life insurance works and how to figure out how much coverage makes sense for your situation.

Why it matters to plan for lost income

Losing the person who brings home a paycheck can wreck a family's finances, and most households don't have the savings cushion to absorb it. About 47% of U.S. households say they'd feel real financial strain within six months of losing a primary earner, according to the 2025 Insurance Barometer Study from LIMRA, a research group focused on the life insurance industry.

Like most insurance, a life insurance policy exists for the moment you hope never comes. The payout usually goes straight to whoever you've named as beneficiary, and they can put it toward everyday costs once your income stops. One notable exception: if a beneficiary is a minor, the death benefit is often handed to a guardian instead.

Even if you don't bring home the biggest paycheck, the people around you may lean on things you do — childcare, meals, keeping the household running — and income replacement can help cover the cost of hiring someone to do that work. Whether you stay home with the kids, share earning duties with a partner, or carry the household alone, a policy can give the people you leave behind some financial footing.

Which type of policy fits this purpose?

Life insurance generally comes in two flavors: term and permanent.

Term life covers you for a fixed stretch — 10, 20 or 30 years are common lengths — and it's usually the most affordable option, which is plenty for most households. You can pick a term that matches how long you actually need the protection. A 20-year policy might carry you through your kids' years at home; a 30-year term could cover a large chunk of your working life. If you die while the policy is in force, your beneficiaries collect the payout. Ideally, once the term runs out, the people who depended on you can stand on their own, so you no longer need the coverage.

Permanent coverage, such as whole life insurance, pays out up to an advanced age — typically somewhere between 90 and 120 — and usually builds cash value along the way. Because it's built to last your whole life, permanent insurance costs considerably more than term. For a 30-year-old woman, a 20-year, $500,000 term policy averages $186 a year, according to Covr Financial Technologies, an insurance brokerage. A $500,000 whole life policy for the same person averages $4,407 a year.

If replacing your income is the only reason you're shopping for coverage, permanent insurance may be more than you need. The people who rely on your income now will likely be self-sufficient by the time you'd retire, which makes paying for lifelong protection unnecessary.

Term vs. whole life insurance: differences and how to choose

How to work out how much coverage to buy

One common way to estimate how much life insurance you need to replace your income is to multiply your annual salary by the number of years you want your family covered. Say you earn $60,000 a year and want five years of protection — that points to a $300,000 policy. Keep in mind this only accounts for your base pay; you'll also want to factor in expected raises and big future costs, like tuition.

You may have come across the "ten times your salary" rule of thumb online, but there's no single formula that fits everyone. If you want tailored guidance, talk with a fee-only financial advisor — they don't earn commissions from insurers, so they have no stake in pushing you toward more coverage than you actually need.

Don't forget the value of everyday work

Factor in what your unpaid work is worth when you're sizing up a policy. Free childcare, cleaning and cooking add up fast to replace. A nanny in the U.S. costs an average of $766 a week, based on 2024 figures from Care.com, an online marketplace for household help.[1] Care.com also puts the average hourly rate for house cleaning at $19.39, based on pay data gathered across 15 cities nationwide.[2] If you're home with the kids and doing this work for free, replacing it would cost real money — and a policy can help cover that gap.

Factor in any coverage from your job

If you already have group life insurance through your employer, you might count that amount toward your total coverage. Just remember these policies are often tied to your job — leave the position, and you could lose that coverage too.

If you're comparing options, a licensed broker can walk you through quotes from multiple insurers so you can see what actually fits your budget.

Revisit your coverage whenever life changes

Check in on your coverage whenever your job, income or family situation shifts. You might add a second policy on top of what you already have, or adjust your coverage if you suddenly become the only earner, or if your expenses rise or fall.

Keep in mind: whether you can raise or lower your death benefit later depends on the insurer. If you expect your needs to change over time, ask about adjustment options before you sign on.

Replacing income is the most common reason people buy life insurance, but it's far from the only one. A few other common reasons include:

• Using life insurance to pay off debt
• Using burial insurance to cover final expenses
• Buying life insurance as an investment
• Using life insurance to leave an inheritance
• Buying life insurance as a homeowner to help cover a mortgage

Because rules around adjusting or canceling a policy vary by insurer and by state, check the specifics of your own contract before making changes.

Sources

The figures above are drawn from primary sources, including industry research groups and companies that publish their own pricing data. Two figures on the cost of household help came from the following:

• Care.com. How much does a nanny cost? Accessed Aug 4, 2025. View source
• Care.com. How much does house cleaning cost? Accessed Aug 4, 2025. View source

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