A Guide to Figuring Out How Much Life Insurance You Need

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September 3, 2020

Unpredictable job and investment markets make it difficult to determine how much life insurance to buy. The standard formulas for buying coverage to match a specific percentage of income are often inadequate and fail to take individual circumstances into account.

Online calculation tools usually tell everyone to raise their coverage by $1 million. But life insurance is a personal issue.

For example, a married couple with three children and a mortgage will need more coverage than a childless couple without a mortgage.

When the markets are down, many people are tempted to shirk their life insurance needs. Major life changes also affect how people deal with their individual needs. It is best to take a systematic approach to buying coverage instead of relying on standard rules and formulas.

One simple strategy

The main purpose of life insurance is to provide survivors with enough funds to pay the final expenses and continue life comfortably.

This is why most calculators are programmed to suggest a chunk of money equal to at least 20 years of regular income. With overall longer life expectancy and a lower savings yield, this may be too high of a goal for most people.

There is a much simpler strategy for figuring out exactly how much insurance you need. It is also better to buy from a plan that is easy to update.

After projecting personal needs from the following four categories, assess the situation to see if extra coverage or different policies are needed.


Debts and mortgages: Write down the total of all auto loans, mortgages, student loans and any other debts. All of these debts may be a serious burden for survivors to handle. However, survivors may choose to keep up mortgage payments. Be sure to allow enough money that this will be possible.

Final expenses: Traditional funerals may cost between $10,000 and $20,000.

While pre-planning a funeral is beneficial, it is even more important to ensure enough life insurance funds are available to pay the final bill. For a reasonable funeral figure, aim for $15,000.


Income replacement: Families will not need 100% of the policyholder's current income. Be sure to deduct final expenses, education costs and debts.

As a rule, it is best to plan on replacing 50% of pretax income until retirement. This amount can be placed in a lump sum by dividing 50% of annual income by 0.05.


Education expenses: Tuition costs vary school by school, and they may be much different by the time children are ready to enroll in college.

The average cost of college tuition has been rising by about 5% each year. This is the same rate life insurance is expected to grow over time. Calculate the future cost of tuition at the desired colleges.

The final calculation

To determine how much life insurance is needed, add all four of the above categories' totals.

If there is no pension, it is beneficial to increase the amount. However, if a spouse earns a considerable salary, it may be feasible to decrease the total.

For family members with unique or troublesome medical conditions, add between $100,000 and $250,000. The overall total usually adds up to a six-figure amount or slightly over $1 million.

Other considerations

Increasing a death benefit on a term life insurance policy usually costs several hundred dollars each year, so the premium amount should not be impossible to pay. To get a better idea of what to expect for a premium, discuss the figures with an agent.

Getting married, having children, buying property and retiring are all life steps that require more life insurance.

There are many different options for this coverage. Young and healthy individuals can usually lock in a low price for many years. Some policies also come with the option to convert to permanent coverage, which can be kept regardless of future health conditions.

Term life becomes expensive after age 65, so it is a smart idea to consider whole or universal policies. To determine the best option, speak with an agent.

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