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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.
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.
Select Start to enter your details and calculate how much coverage you need in less than three minutes.
Follow these 7 steps to figure out how much life insurance to buy, or by using a life insurance calculator.
An example of your rough numbers to decide how much coverage to buy:
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.
When you’re figuring out how much life insurance coverage to buy, these factors may weigh into your decision:
If you have loved ones who rely on your income, consider the expenses you pay for now and anticipate any future costs.
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.
Consider your family’s daily living expenses, covering bills like your mortgage, utilities, groceries, car and home insurance.
A life insurance policy can give your company and its executives and employees financial security if you die prematurely.
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.
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 policies and prices from major insurers side-by-side to find the best possible deal.
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.
If you come up with a coverage amount that you can’t afford, consider these options to lower the cost of your life insurance premiums:
If these scenarios apply to you, you may not need life insurance right now:
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.
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