How Much Life Insurance Do I Really Need?Find out how much life insurance you need and see which plans will cover your financial responsibilities.
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A big question that many people ask is, “how much life coverage do I need?” The answer depends on a few things and each person will require a different amount of coverage.
Getting the right amount of life insurance coverage will cover any debts and ensure the financial well-being of your beneficiary after you’ve passed away. You can also choose to divide your policy’s benefit among more than one beneficiary.
Read our guide to understand how much life insurance you should get, what factors you should consider, and which plans are right for you.
What Is Life Insurance?
A life insurance policy is a contract that financially covers a policyholder’s life for a specific amount of money.
In return, policyholders pay a monthly or annual premium to get this coverage. When the policyholder dies, their beneficiary can claim the contract’s value (known as the death benefit).
What Are My Life Insurance Options?
There are two main types of primary life cover: term life insurance and permanent life insurance.
Term life insurance offers life coverage for a specified number of years after which it expires.
Permanent life insurance covers a policyholder for their entire life and does not expire.
There are a few more differences between these types of insurance. If you’d like to learn more, read our article on term vs. permanent life cover.
A person can also buy supplemental life insurance which offers additional financial protection for people who already have permanent or term life insurance.
Supplemental insurance covers a policyholder for a specific event, such as accidental injury, disability, or illness.
It’s important to note that supplemental life insurance is not a substitute for a term or permanent life insurance policy.
Calculating Your Coverage Needs
Figuring out how much life insurance you’ll need can be tricky. You’ll need to consider multiple factors if you want to get the right amount of coverage.
This will depend on the number of existing assets you have, the amount of debt you need to service, and the ability of your family members to cover your expenses when you die.
Use this formula to determine how much life coverage you should get:
1) Add Up All Your Debts and Financial Obligations
Some common examples of debts and financial obligations include:
Your mortgage payments: The amount of money you still owe on your house.
Your annual income replacement: The amount of money that will stop coming in if you die that is needed to cover living expenses for your family. This includes things like health insurance, living expenses, rent, and any other expenses you pay each month.
Larger debts: If you own a business or other properties, or if you have taken out personal loans, will your family be able to cover these costs when you die?
Funeral expenses: Have you made provision for the cost of your burial or cremation, funeral service, and other final expenses? Consider these costs and add them to your financial obligations.
College Fund: If you have a 529 plan college fund for your child, does it have enough in it to cover the cost of tuition if you aren’t there to pay for it?
2) Then, Add Up All Your Current Assets
Some examples of assets include:
Life Insurance policies: If you already have life insurance policies in place, include your current coverage amounts in your asset calculation.
Your savings: If you have saved money over the years or contributed towards an Individual Retirement Account (IRA), then add these to your assets. This includes any money you’ve put aside for your children’s college education.
Investments: If you own stocks, bonds, buildings, or other types of assets, include these amounts in your calculation.
3) Finally, Subtract the Second Number (Your Assets) from the First Number (Your Debts) and You’ll Get an Idea of What Kind of Coverage You Need to Purchase
Get Assistance from a Financial Advisor
If you are unsure about how to calculate your total assets, expenses, and overall financial obligations, ask a financial advisor.
Getting professional financial advice will save you time and allow you to plan your financial future better. If you’d like assistance with figuring out your life insurance needs, speak to an agent from PolicyScout.
Based on this calculation, you’ll be able to tell how much insurance you might need and whether you’re overinsured or underinsured.
Neither of the above situations is ideal, and the best way to avoid this is to accurately calculate how much coverage you’ll need.
Knowing the Difference between Being Overinsured and Underinsured
Underinsured: This is when you don’t have enough life insurance to meet your financial obligations and debts.
For example, if you have a $50,000 mortgage but you are only insured for $35,000, you won’t be able to cover the debt you owe with your insurance.
Overinsured: This is when your insurance covers more than your debts and financial obligations.
For example, if you have the same mortgage but are insured for $60,000, you’ll be paying for coverage ($10,000) that you don’t need.
You can get an accurate picture of your insurance coverage needs by looking at:
How much income do you receive
Your financial responsibilities
Your financial goals
The number of dependents you have
We’ll cover some considerations that play a large part in calculating your financial profile and determining your coverage.
How Much Life Insurance Do I Need Based on My Income?
Along with your assets, income will probably play the largest part in figuring out your life insurance needs.
This is because a person’s income should ideally match their debts, assets, and financial circumstances.
The general rule that most life insurance companies use to work out a policyholder’s coverage needs, is to multiply their annual income by a factor of ten (ten times your current annual income.)
For example, let’s say a person has an income of $65,000 per year. If they’d like to get the right amount of life coverage, they’ll need to take out a life insurance policy worth $650,000. This amount should cover your debts and financial obligations.
Other considerations you should keep in mind if you are deciding on the amount of coverage you need, include:
Whether or not you have dependents
Whether you’re married
Whether you work or stay at home
A good option for covering outstanding debts and expenses is final expense life insurance. This is a type of permanent life plan that can be used to cover expenses such as hospital bills, funeral costs, and estate transfer fees.
How Much Life Insurance Do I Need If I Have Dependents?
If you have dependents, you should take their financial well-being into consideration when taking out life insurance coverage.
This is especially important if you are a parent or if you are taking care of an older family member.
For example, a person who has three children will likely need more life insurance than a person who doesn't have any dependents.
By getting the right amount of coverage, you’ll ensure that your family is taken care of should something happen to you.
If you have dependents, remember that your life insurance must be able to cover their:
Health care costs
You should also factor in the number of years that it will take for them to become financially self-sufficient and use this as a guideline to calculate your total coverage needs.
For example, if you have two children aged 16 and 12, you’ll want to cover their living expenses for a few more years, along with the cost of college and other expenses while they’re studying.
If your current income is $65,000 a year, you’ll need your life insurance to cover at least the next six years and any expenses your children might have until they get their first job.
If you get coverage for $650,000 (10 x $65,000), you’ll probably be able to provide your children with the necessary money to become self-sufficient.
Think about Rising Costs When You Plan Ahead
If you have a young child, you should also consider inflation and price increases when you are calculating your coverage needs.
For example, the average cost of an out-of-state college degree is $172,644 in 2022.
Prices, however, tend to increase every year and you may find that it will cost a lot more by the time your child is old enough to go to college.
Similarly, if you are taking care of a parent, you’ll need to calculate how long your life insurance coverage will be able to support them.
Consider the cost of a retirement home, Medicare insurance, and other living expenses you’ll have to cover. Then estimate the number of years that you’ll need to provide for your loved one.
For example, let’s say a 36-year-old who earns $59,000 a year and takes care of a mother who just turned 64, wants to get life coverage.
They need to look at the cost of care for their parents for at least another 20 years and factor in other costs like clothing, traveling, and any other expenses they might need to cover.
How Much Life Insurance Do I Need at My Current Age?
Your age will also play an important part in determining how much life insurance coverage you need.
Keep in mind that older individuals usually pay more for coverage than younger people because they have a higher risk profile.
What Is a Risk Profile?
A risk profile is a person’s probability of dying at any point. Life insurance companies create risk profiles for each person who applies for a life insurance policy with them to assess the risk that their company is taking on.
Things that will increase your risk profile, include:
5) Medical history
6) Driving history
If you’re wondering about your risk profile and whether you qualify for life cover, speak to one of our agents to assist you.
If you are older and have a partner who is the same age as you, you will want to make sure that you can cover their expenses and that your life insurance benefit will provide them with the same standard of living they’re used to.
Different Life Insurance Options
There are multiple coverage options that you can get these days, and there is no limit to how many life insurance policies one person can get.
There is always the risk that you might be paying too much each month for coverage that you don't need.
For example, let’s say you are paying $1000 each month for three life insurance policies that will pay out $2 million dollars.
However, for the sake of this example, imagine that your existing assets and financial obligations are only $1 million dollars.
You should also consider whether you want to get a life insurance death benefit that will only cover your funeral costs, or final expense insurance to cover unpaid hospital bills, estate transfer costs, and all other final expenses.
The best way to see what type of life insurance you might need is to speak with an insurance agent about your insurance needs, your financial goals, and your concerns.
Insurance agents can tell you whether you should consider a term life insurance plan for certain expenses.
Supplemental Life Coverage
It’s also important to figure out if you need supplemental life insurance along with your primary plans.
Supplementary life insurance is an extra measure you can take to make sure that you can keep paying your life insurance premiums if you fall ill, get injured, or become disabled and cannot work.
The most common types of supplemental life insurance are AD&D cover, disability cover, and dread disease cover.
These plans range in price but usually cost less than primary life insurance (permanent and term life insurance).
Ask your life insurance provider if they offer any of these additional insurance riders if you have a life insurance policy in place. Or reach out to us if you’d like to find out more about your supplemental coverage options.
Where Can I Learn More about Life Insurance Coverage?
If you’re thinking about purchasing life insurance or just want to learn more about your options, visit our life insurance hub.
Our articles cover a range of topics that can help you find a plan that is perfect for you.
If you have a specific question or need help with finding a life insurance provider that will offer you great coverage, reach out to one of our life insurance agents today.