This article was reviewed by Andrew Flueckiger, a member of the Finder Editorial Review Board and certified insurance counselor and licensed insurance agent in five states.
While there are common coverage amounts — like $250,000, $500,000 and $1 million — the amount of coverage you need boils down to your financial obligations and how much you’re willing to pay in premiums. Ideally, your payout will cover living expenses and outstanding debt for your loved ones, but it’s important to choose a policy you can comfortably afford now.
Find out how to do the math based on your budget and income.
How much life insurance do I need?
Your life insurance coverage should be enough for loved ones to pay for current everyday expenses, plus any future needs like college, medical bills and funeral costs.
The best way to figure out the exact coverage amount is to think through all your expected expenses, then subtract any savings or other income your loved ones will have. Some experts recommend this rule of thumb: Get coverage equal to 10 times your annual income. So if you make $50,000, you’d buy $500,000 in life insurance as income replacement for 10 years.
But this general rule doesn’t factor in debts, future raises or inflation. It also may leave out important financial needs that aren’t considered when multiplying by a flat number, says the Insurance Information Institute.
How do I calculate how much life insurance I need?
Select Start to enter your details and calculate how much coverage you need in less than three minutes.
Start with your current income plus future raises.
Calculate how many years you’ll need that income.
Factor in ongoing bills, such as mortgage payments.
Increase any future costs, such as health costs.
Add future savings, such as kids’ college funds.
Consider adding a little extra for funeral planning.
Subtract any other savings you have.
An example of your rough numbers to decide how much coverage to buy:
$30,000 annual take home pay plus 3% raises
x 20 years until retirement = $800,000
+$100,000 left on mortgage payments
+$150,000 healthcare costs when retired
+$20,000 for kids’ college tuition
+$10,000 for funeral costs
-$80,000 in savings and 401k
=$1,000,000 in coverage
How much life insurance can I afford?
To figure out how much life insurance you can afford, look at your monthly income versus your monthly expenses.
It’s important to choose a policy with premiums that stay within your leftover income. That way you can keep up with the payments — and keep your coverage. For example, the average cost of a $250,000 term life policy for a nonsmoking 30-year-old is $160 a year or $13 a month, according to Finder’s analysis of rates across 14 life insurance companies.
7 factors that affect how much life insurance you need
When you’re figuring out how much life insurance coverage to buy, these factors may weigh into your decision:
1. Your dependents
If you have loved ones who rely on your income, consider the expenses you pay for now and anticipate any future costs.
Spouse or partner. Consider your partner’s age, health and lifestyle, plus how many years both of you have until retirement. If your partner brings an income, you may not need as much coverage.
Children. Consider boosting your coverage if you have kids or are planning to have kids.
Other dependents. Consider whether aging parents or other relatives could get by without you or your income.
Pets. You can set up a beneficiary and caretaker for your pet and leave some of your death benefit to cover pet care.
2. Existing debt
Not all debts die with you — some get paid off by your estate or transferred to your parents or partner, according to the Consumer Financial Protection Bureau. Factor individually owned and co-signed loans into your insurance coverage, like a mortgage or credit card debt.
3. Current expenses
Consider your family’s daily living expenses, covering bills like your mortgage, utilities, groceries, car and home insurance.
4. Future expenses
Education plans. Factor in future college or private school costs, like tuition, boarding and books. The average cost of a four-year college is $27,357 a year, according to the National Center for Education Statistics.
Long-term care. Think through any medical or nursing home expenses you’re covering for parents or aging family members and include them in your life insurance policy. The cost of long-term care often falls in the $4,000 to $8,000 range per month, according to the US Department of Health & Human Services.
End-of-life expenses. To ease your family’s stress after you die, you can add enough coverage to pay funeral costs. Funerals can cost over $7,000, according to the National Funeral Directors Association.
5. Business ownership
A life insurance policy can give your company and its executives and employees financial security if you die prematurely.
6. Leaving a legacy
You can buy higher coverage than your loved ones need for expenses to give them a financial safety net when you’re gone. Then, they can maintain or enhance their lifestyle, or even set up a charity in your name.
7. Other financial plans
When you’re calculating the coverage you need, subtract any existing savings in your savings accounts, 401k, 529 plan or other savings and investments.
Compare life insurance companies
Compare policies and prices from major insurers side-by-side to find the best possible deal.
Ask an expert: How to lower life insurance rates
Jake Tamarkin CEO & Cofounder of Everyday Life Insurance
Expert financial planners know that people’s needs will decline over time as their savings build, kids grow up and retirement nears. You can save 50% or more just by doing a good job of truly assessing your needs and how they will evolve over time and building a coverage plan that matches that.
So, before you buy that gigantic 30-year policy, consider if it makes sense to perhaps get a couple of smaller policies that phase out over time. A good insurance agent should be able to help you price out different coverage options like that, and at the end of the day, that could be more consequential than which insurance company you choose to work with, or what bells and whistles they tack on to their products.
Ladder policies. Stacking policies could lower your rate. You may buy a $300,000, 30-year term policy to fit your mortgage, plus a $200,000, 20-year term policy to cover your kids’ education.
Buy what you can afford now. You can get another term policy later that satisfies larger coverage needs. But your quotes rise as you age.
Start healthy habits. Improving your health can score a much lower rate. If you’re improving your health, you might wait to buy until you score higher on the medical exam.
Skip add-ons. You could delete any policy riders to lower your monthly premium.
Avoid policieswith under 10-year terms or $50,000 in coverage, which cost more for the coverage. Opt for the lowest standard coverage offered, like a $100,000, 10-year term.
Who doesn’t need life insurance?
If these scenarios apply to you, you may not need life insurance right now:
You don’t have anyone relying on your income. The primary purpose of life insurance is to replace your income when you die. If you don’t have anyone relying on your paycheck, like a spouse, child or pets, you may be able to hold off on buying a policy. But if you think your situation may change in the future, it could be worth locking in a low premium while you’re young and healthy.
You don’t have any debt or major assets.Many people buy policies to cover their outstanding debts and protect their assets — such as a house — when they die. If you haven’t accumulated any assets or debt yet, you may not need life insurance.
You’ve built up enough money from savings and investments. If you have sufficient savings, healthy retirement accounts and solid investments, you may be able to self-insure. This means your loved ones would be able to cover their living expenses and financial needs using the accounts and liquid assets you already have.
You have group life insurance with plenty of coverage. Group insurance policies are offered by employers, and they’re typically limited to small amounts like $100,000. If you do the math and discover your financial obligations come to less than that, you may have sufficient life insurance through your workplace.
Personalize your coverage level based on your financial obligations and the premiums you can afford. Then, compare life insurance companies to find the best possible policy for your budget.
Katia Iervasi is a staff writer who hails from Australia and now calls New York home. Her writing and analysis has been featured on sites like Forbes, Best Company and Financial Advisor around the world. Armed with a BA in Communication and a journalistic eye for detail, she navigates insurance and finance topics for Finder, so you can splash your cash smartly (and be a pro when the subject pops up at dinner parties).
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