How Much Life Insurance Do I Need?

Preparing for what is to come can be a celebration of life and an opportunity to remember what is truly essential: those who remain behind.

And what better way to ensure the well-being of our loved ones than by providing them a departing gift that can afford them a measure of protection in the face of financial uncertainty?

If you have already chosen to invest in life insurance for you or your family and have decided on a policy that meets your needs, the next logical step is to determine how much coverage you need to purchase.

There are many types of life insurance products out there, but essentially it comes down to two products: permanent life insurance or term life insurance.

Whether you opt for term life insurance or a policy with a cash value component, your coverage amount should always reflect your current financial situation. 

Before deciding on a death benefit amount, keep track of your income and expenses.

Knowing exactly how much you make on a yearly basis, which portion of that you spend, and what you spend it on can help you approximate what your loved ones will need to make up for when you are no longer able to provide for them.

CALCULATE INCOME AND EXPENSES

How much debt do you have aside from your mortgage? 

Do you add to your debt each month? 

Do you pay it down each month? 

How much do you spend each month?

It’s easier to protect your family if you know just how much you need every month. 

Don’t make a guess, do the work to find how much term coverage is sufficient. 

Give it careful thought. 

After all, this is about your legacy.

How much do you save each month? 

If you are into the habit of saving money, keep it up. 

By doing this, you probably don’t need to replace all your income, so you need less term life insurance.

After assessing your monthly income, take into account the funeral and burial costs, mortgage payments, car, and medical insurance payments, as well as any other financial responsibility you are currently assuming.

Here are two popular rules of thumb that can be helpful in determining the right amount of coverage:

Multiply Your Income By 10

You may have heard that the general rule is that you ought to purchase life insurance worth ten times your income, yet that formula is somewhat simplistic when you consider all the factors that should come into play when determining your family’s future livelihood.

If you are not looking to replace your salary for life, many suggest just getting 5 to 10 times your current salary insurance. 

The idea with this is to help your family pay off debt and have some time to grieve without worrying about financial problems. 

However, bear in mind that this won’t replace your full income for their lifetimes.

If needed, try to procure a coverage amount that equals or exceeds your current salary, while also considering external factors such as inflation and other contingencies.

Use “the Dime Formula”

This formula takes into account education, mortgage, income, and debt.

If your salary is your family’s primary source of income, make sure to factor in the following:

• The total cost of benefits you may be receiving through your employer, such as medical insurance, 401k contributions, etc.
• All pending responsibilities, whether they’re mortgage payments, credit card debt, or medical bills.
• Education expenses for each child dependent in the household.
• Any services you currently provide for your family that they would have to cover in the event of your passing, such as home maintenance, tax filing, child care, etc.

To calculate the amount of life insurance you need, add up all applicable expenses and subtract your assets and savings. 

Follow life insurance companies’ lead and base your projections on hard facts and statistical information.

Bear in mind that the average funeral and burial expenses in the United States can go well above $10,000, depending on your state and the type of service selected.

Also consider that the average cost of college tuition could range from $10,000 to $20,000 a year, making the total amount required to attend a four-year college over $80,000 per child, if the cost of higher education doesn’t skyrocket any higher than it has in the past decade.

CONSIDER YOUR OPTIONS

Regardless of how much coverage you need, think you need, or someone says you need, the most important consideration is to examine how much life insurance you can afford.

Besides considering your budget, it’s important you learn that missing payments can result in the termination of your policy, leaving you with no life insurance at all and possibly having to take out a new policy with a higher premium.

It is better to opt for a smaller, more affordable policy than to risk losing coverage altogether when you experience difficult situations in life.

While you have the opportunity, learn how you can save on funeral costs and iron out potentially costly details such as casket and gravestone selection.

If you have the means, consider planning for your children’s future education separately, and go over alternatives such as college savings plans and scholarship opportunities.

As a way to reduce potential expenses and further cover your family in the event of an emergency, think about setting up additional income sources such as a secondary life insurance policy for your spouse, or a joint life annuity that guarantees a lifetime benefit for either of you.

If you already have an additional life insurance policy through your employer, are due to receive a pension, or have a secondary source of income, calculate that into your death benefit estimates as well, in order to avoid spending more in life than what your family would require upon your death.

Remember to include your loved ones in the decision-making process, as their feedback can be more valuable than any amount of research you conduct.

For those looking for an easier and faster way to calculate expenses, know that some of our partner companies, like John Hancock, offer free online tools that may help you determine your life insurance needs in a matter of seconds.

After filling in a few details, such as debt, expected college plans and children or other depends, you can get an estimation of how much life insurance you may need.

Recalculate Your Needs

Determining how much life insurance you need is something that you will have reassess more than once. 

The amount of protection that you need in your 30s may be significantly different than what you might need in your 50s or 60s.

Insurance experts suggest that you consider recalculating your needs after every major life event such as marriage, birth or a child, divorce or death in a family. 

Pregnant women who need coverage may want to apply for life insurance since complications in pregnancy could affect their eligibility or premiums.

If you already have a policy and need additional coverage, consider buying a second plan instead of replacing an existing one.

Also, after a major life event, we recommend that you contact your insurance company to verify if you need to update your beneficiaries along with your coverage amount.