How Much Life Insurance Do You Need?
Quick Note: If you’re looking for a more detailed overview of how life insurance works, we have you covered in our Core Content.
Does anyone rely on you financially? If yes, then it’s a good idea to have life insurance. But how much do you need? While there’s no exact amount that will be right for you, there are some general guidelines to help you decide.
1) How much annual income do would you want to replace?
The more income you would need to replace, the more coverage you’ll need to buy. Figure out how much you and your family spend each year to support your current lifestyle. It doesn’t need to be exact, but the more accurate you can get, the better.
If you already use a budget, it will be a lot easier to figure this out.
2) How many years of replacement income would your family need?
Next, you’ll want to determine how many years of income you would need to replace. If you have young children, you’ll probably want them covered until their old enough to earn their own incomes.
Multiply the annual income you want to replace by the number of years.
3) How much do you want to contribute to your children’s education?
As you probably know, education is costly, specifically higher education, like college. So if you have children, it’s important to make sure their future education costs are covered. According to The College Board’s annual Trends in College Pricing report for the 2018-2019 school year, the average annual cost to attend college (tuition, fees, room and board) was $21,370 for in-state public universities, $37,430 for out-of-state public universities, and $46,680 for private institutions. Large numbers to say the least. And unfortunately, these tend to rise every year.
So you’ll want to create a reasonable estimate of what it would cost for your children and add this number to your balance.
4) How much do you want to contribute to a funeral
Funerals are expensive. According to the National Funeral Directors Association, the median cost of a funeral with burial in 2017 was $7,360. Of course you’ll have a range of options, some more expensive than others. But no matter what, it’s not a financial burden you’ll want to leave with your loved ones.
Add a funeral cost estimate to your total.
5) How much debt do you currently have?
You won’t want to leave your loved ones holding large debt balances if you die unexpectedly. So add up all of your outstanding debts, including your mortgage, auto loans, and any other loans you have.
Then add this amount to your total.
6) How much do you have in savings and investments?
To the extent you’re comfortable with your family spending this money, you can subtract it from the amount of insurance you need. However, if this money is intended for your spouse’s retirement, you won’t want it to be spent too soon. If that’s the case, don’t subtract it from your balance.
7) How much life insurance do you have already?
You might already have some life insurance through work. It’s often less than you’ll ideally want to have, so you’ll need to purchase additional coverage. But don’t forget to include it. Subtract this existing coverage from your balance.
8) Consider any other large expenses you’ll want covered
This is a catch all for any other specific financial needs you want covered. If there’s anything specific to your situation that we haven’t included, be sure to estimate the cost and add it to your balance.
Adding it all up
By this point, you should have a reasonable estimate for how much life insurance you’ll need. But you’re not quite done! Be sure to periodically review your policy to make sure it still meets your needs. You could do this once a year or after major life events. So what are you waiting for, it’s time to make sure you’re insured!
Anything else we can help you with?
