How Much Life Insurance Do I Need?

how much life insurance do i need

How much life insurance you need depends on your personal and financial conditions. Typically, your life insurance payout should be enough to replace current income and cover your dependents' expenses in the case of your death.

It is normal for people to be concerned about the long-term welfare and well-being of their family and loved ones, especially in the event of their own death. As a person ages, this concern becomes more prominent. Though there are numerous plausible solutions, buying a life insurance policy is a solution that is more common than others. 

Why Get Life Insurance?

Life insurance is a great way to prepare for an unexpected death. People searching for information or shopping for life insurance policies acknowledge that there is much to be gained with this option.

The primary benefit is that it offers substantial comfort and confidence that those left behind will have the financial stability to manage daily living expenses, even after they are gone.

Additionally, a life insurance policy can help pay for funeral and burial expenses, clear remaining debts, pay off mortgages, and even provide funds for their children's college education, among other things.

Deciding How Much Life Insurance To Get

However, the real dilemma arises when trying to decide on the actual amount. 

How can one decide how much money dependents will need to maintain their standard of living? This question significantly influences the face value of the life insurance policy that a person will choose.

No doubt, this amount varies from person to person. However, life insurance needs are greatly dependent on various personal and financial circumstances, current and future ones.

So, it is not surprising that many insurance agents face a common question: “How much life insurance do I need?” The fact of the matter is that even a life insurance agent cannot tell anyone exactly how much life insurance they should buy. However, a life insurance agent can give a fairly good estimate of the amount that will be enough to cover the dependents' expenses.

How To Calculate Life Insurance Coverage

There are a few different ways that this can be done.

For instance, the amount for life insurance can be estimated by multiplying the annual salary by 10. Though this is not entirely a bad method, it does not consider a lot of other factors.

Another technique is to multiply the annual salary by the number of years left until expected retirement. Again, this is just an approximation.

A more accurate way to calculate how much life insurance coverage an individual requires is to total the financial obligations and subtract the assets. 

This is how the simple formula can be applied correctly:

[Financial obligations that need to be covered] – [existing assets] = life insurance that is needed

To understand what all this means, let's take a closer look at what these terms mean. Not only will it help calculate how much life insurance coverage is needed, but it will also make it easier to follow the steps:

1. Determine All Financial Obligations

You can calculate this with the help of a simple formula.

Financial Obligation = Expenses + Debt 

Financial obligations cover all expenses of raising a family alongside any pre-existing debts.

This may include the following:

  • End of life expenses

Surprisingly, the funeral and burial expenses can add up pretty quickly. Currently, the average cost of a funeral ranges between $7,000 and $12,000, which encompasses transporting remains to a funeral home, embalming and other preparation, viewing, casket, burial, etc.

Including these final expenses in life insurance coverage alleviates families from dealing with the financial burden of death when they are very emotional.

  • Dependents

The cost of raising a child is high. Currently, the average cost of raising a child until age 17 in America is about $233,600. For low-income, married couples, the number slips down to almost $174,700 per child.

But besides children, there can be other dependents, such as an aging parent, under a person’s care. Therefore, the policy amount will need to be increased to cover their expenses as well. 

  • Children’s college tuition

This is a major expense that should be taken into account, especially if each child plans on attending a private, out-of-state, four-year university. However, getting the right amount of coverage requires anticipating the yearly rise in the average cost of tuition.

  • Income replacement

A person who is the sole provider of a family wants to ensure that their dependents will have enough money after they pass away. Therefore, the person will want to take out a life insurance policy that is big enough to replace their income.

For instance, if a person earns $50,000 a year, their family will need a policy payout of the same value or slightly larger value to accommodate inflation.

  • Debts and liabilities

If a person has outstanding debt, the family may be held responsible for its repayment. The aim is to acquire an insurance policy that leaves enough money for beneficiaries to completely repay all loans.

For instance, a spouse who co-signed the mortgage will not be suddenly burdened with the loan's repayment, nor will they be in danger of losing the house. The same can be applied to an auto loan, student loan, or any other large debts.

2. Total Resources and Existing Assets

Tally up resources and existing assets to determine how much is available for family members. This includes after-tax income and liquid assets, such as cash, checking, and savings accounts. You’ll need to take a note of annual income and how much you own in assets.

Back to the original question: what amount of life insurance coverage is enough? Personal and financial circumstances can influence and necessitate different coverage needs. Based on the immediate family's individual circumstances and requirements, it becomes significantly easier to determine the amount.

After adding up all the long-term financial obligations, simply deduct all the existing assets. The coverage gap is how much life insurance needs to be bought. However, consider adding on a little more to ensure a financial cushion.

Additional Life Insurance Information

Once the required face value of a life insurance policy has been determined, it’s time to compare policy rates and offerings. An individual must search the market for companies that offer the best rates.

Lately, COVID-19 has shaken things up. A lot more people are shopping for and reconsidering their need for life insurance. To ensure that products and policy applications have not recently changed, always contact a life insurance company and inquire about current quotes and prices.

To help you make the right choice, get the latest quotes and prices of our products and life insurance policies. Visit our website and get in touch with one of our representatives.

Health and age are important factors that determine how much insurance coverage should be purchased. As an individual gets older, usually there is less debt and fewer dependents to support. Thus, the coverage amount is also smaller. However, life insurance rates increase anywhere from 4.5% to 9% every year that a person ages. Purchasing one when you’re young and healthy is a more affordable option.

The price of a policy is no doubt influenced by several factors. But remember that investing in life insurance equates to an added expense. At the end of the day, a policy is beneficial only if the premiums are paid. So, choose one that fits easily into your budget.