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How Much Life Insurance Do I Really Need?

How Much Life Insurance

t would be great if there was a simple way to determine how much life insurance you need. There just isn’t. The reality is that this question is answered differently for each person.

That being said, there are ways help determine the right amount of life insurance. A good place to start this analysis is to think about the financial gap that your family or loved ones will need to fill if you’re gone. With your family’s needs in mind, begin by taking an inventory of your assets, subtract your debts or other financial liabilities, and now you have a basic or minimum amount of coverage you should consider.

But how much life insurance is right for me?

Some national financial blogs recommend you purchase 7-10 times your annual income in life insurance coverage. That might sound like a good rule of thumb, but does it really take into consideration your unique financial situation. Does it consider your monthly budget?


There may be a better approach. As we stated above, a better approach to establish a minimum amount of life insurance coverage is to take the total value of your present assets, then subtract your debts and other financial liabilities:

= Current Debt & Financial Liabilities – Present Assets = Minimum Coverage Amount

The answer to this equation is the financial gap between your family’s current funds and anticipated expenses. Now that you’ve established a minimum, the policy you need to purchase should have enough coverage for that financial gap and other future goals, like tuition, burial, and contingencies. If you’re considering a term life insurance policy, the limits range from $250,000 to $1 million. In this range you should be able to find the amount that is right for you. Equally important will be to balance the coverage needs with the premium.

What debts, assets and financial liabilities should I consider?

The debt and  financial liabilities to include in any financial gap analysis should be those that are present loan or mortgage debt, or any instrument that obligates your to future payments.

Financial liabilities to consider:

  • Your home’s mortgage: Your mortgage is a typically the largest family debt. Your life insurance benefits can be used to payoff the mortgage on the family home, or make the monthly mortgage payments.
  • Any loan payments: Over the course of your life, you will secure certain loans, either for a car, higher education, or home equity. You should consider all of these loans as your family will need to take over these liabilities upon your passing.
  • Credit cards and other debts: Credit card debt is an obvious liability to consider, but you should also consider medical or dental bills (eg. orthodontics for children).
  • Recurring childcare expenses: The average cost of raising a child from birth to age 17 is an eye-popping $233,610. That doesn’t include the cost of college, which ranges anywhere from $20,090 to $45,370 annually. Make sure to include these expenses when considering your debt and financial obligations.
  • End-of-life or funeral expenses: Funeral costs are typically around $10,000 or more, so it’s important to make sure to have enough coverage for these costs.
  • Legacy gift, contingencies and financial cushion: If your goal was to leave something behind for your children, grandkids, or other loved ones, life insurance benefits can make this possible in you absence. Additionally, you can also add more coverage simply to give your family more savings.

What are the assets I should consider?

Simply put, an asset is a thing of monetary value owned by you, that you benefit from, or that you have use of for the purposes of generating income. These can be items such as:

  • Personal savings and/or investments: The money you have tucked away in your nest egg, stocks and bonds, mutual funds, or any inheritance is certainly an asset.
  • Retirement savings: If you have money invested in an employer-based retirement fund (eg. IRA’s or 401(k) plans) are considered assets for consideration. Even your Social Security can be considered in your asset calculation.
  • Any existing life insurance policies: Policies, other than the new policy you are considering, are assets to considering your evaluation.

So, why do all of this? Well, you should your family have to go one without you, you want to make sure they have enough money to pay the bills and maintain the lifestyle you had planned to create.  As long as you maintain your policy, pay the premiums, and it’s active, the designated beneficiary (or beneficiaries) listed the policy will receive a lump sum benefit payment they can use to:

  • Replace your income
  • Pay loan or credit card debts
  • Payoff or make mortgage payments
  • Cover the monthly expenses
  • Cover funeral or end-of-life expenses
  • Pay for future goal like a child’s college tuition

What are the other considerations?

Asset and debt analysis is pretty straight-forward. There are other things you should consider when determining how much life insurance you need that are less objective. Her are a few other things you should take into consideration when your deciding to purchase life insurance.

Are you or your spouse a stay-at-home parent?

If this is a characteristic of your household, then when the unexpected happens the burdens of the stay-at-home parent will shift. The surviving parent now needs to consider expenses such as childcare, meal preparation, transportation, grocery shopping, laundry, and other responsibilities that were formerly handled by the stay-at-home parent. In some instances, you should consider a life insurance policy for the stay-at-home parent that is roughly half the amount of the employed parents policy. This is a typical amount and can often pass underwriting scrutiny.

Do you have a group employer life insurance benefit?

It is common for people get a group life insurance benefit through their employers compensation package. However, in most cases, this life insurance benefit is simply not enough coverage. In fact, some research suggests that having only employer based life insurance may contribute to a coverage gap of $225,000 on average.

While it’s true, employer based plans do give the option to purchase additional coverage, these plans are still insufficient and don’t survive when you change employers as most of these plans expire along with then end of your employment tenure.

How to fit the right coverage into your budget

Lastly, and maybe just as important, it’s appropriate to only buy as much life insurance as you can afford. There is a proper balance in the amount of insurance you need, and the coverage you can afford. Remember, the more coverage you buy, the more expensive the policy. Sure, life insurance is much less expensive than most people think, but you need to manage the costs. Here a few tips to get the best price:

  • Don’t wait, buy when you’re young: It’s better to buy sooner rather than later, since the cost goes up every year you get older. Plus, if you develop a health condition, getting covered will be even more expensive or you may not qualify for coverage at all. Life insurance gets more expensive as you get older, with premiums going up an average of 8% to 10% a year. The smart move is to buy more coverage now if you think you’ll need it later, so you can lock in a lower rate from the start.
  • Shop and compare quotes: This can help you find better rates for the same amount of coverage, so it’s worth shopping around or talking to an agent to get the best quote for your needs.

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