How Much Life Insurance Do You Need?

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How much life insurance do you need?
How to calculate how much life insurance you actually need
Other factors to consider when calculating life insurance

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Unpredictable markets such as the one you're dealing with at the start of this year are rough on retirement planning. They also complicate the issue of how much life insurance is right for you.

Standard general rules — such as buying coverage equal to eight times your annual income — aren’t always appropriate, and while they can be helpful, online calculators will sometimes tell you to raise your coverage by $1 million even if you already have insurance.

The truth is, many factors influence how much life insurance you need. From how much your family depends on your income to whether or not you need life insurance to cover other expenses such as your kids' college education or your final expenses, different factors can dramatically impact how much life insurance you need.

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Instead of aiming for a higher number than you think you need, take the time to do some math and figure out how much coverage is enough to secure your family's financial future.

Here's how to figure out how much is right for you so you don't overpay for too much coverage or undercalculating how much your life insurance beneficiary needs.

How much life insurance do you need?

Overall, how much life insurance you need is a personal affair. That means there's no one-size-fits-all answer to the question of how much you need.

Two couples might earn equal salaries, but it’s silly to say that someone with four young children should have the same coverage as empty nesters with no mortgage and a substantial retirement fund.

Additionally, you’ll likely experience life events that call for changes in your insurance. Such things as marriage, parenthood, homeownership, college expenses and retirement can all dramatically change the amount of coverage you need.

Instead of relying on general rules, you’re better off taking a systematic approach to figuring out your life insurance needs. To do that, use these tips to calculate exactly how much coverage is right for your situation.

How to calculate how much life insurance you actually need

A senior couple discusses their finances while sitting on the couch.

The purpose of life insurance is to financially protect your loved ones after you pass away. For instance, life insurance can guarantee your family can live normally in your absence, paying bills as before.

For this reason, some experts and most online calculators sponsored by the insurance industry seek to figure out the chunk of investment capital it would take to replace all your income for 20 years or longer, held securely in Treasuries or municipal bonds and certificates of deposit.

However, this approach can aim higher than necessary, especially if you assume raises and promotions.

Instead of basing it on your projected income over the next two decades, it's more useful to come up with a number for how much your family would actually need. To start, sum up the estimated costs to your family in the following four categories.

1. Final expenses

A funeral and related expenses average $6,280 for cremation or $8,300 for burial, according to the National Funeral Directors Association. But the actual cost can vary widely, as items such as the type of grave marker or the casket chosen can dramatically influence the final price.

Additional expenses such as meal catering or travel and accommodations for loved ones attending the funeral from out of state can also bring that cost up further.

Your beneficiaries might be able to get the tax-free proceeds from life insurance faster than if they waited for money from your estate, so it's a good idea to include this in your calculations.

You can use $15,000 as a ballpark number, but you can also preplan your funeral to get a more precise estimate of how much coverage you'd need here. Funeral planning can also prevent further grief by taking the burden of those logistical decisions off your family.

2. Mortgages and other debts

Total your mortgage balance, car loans, student loans and any other debts that would be a heavy burden on your survivors. Making sure your life insurance benefit is enough to make your family debt-free can go a long way toward ensuring a healthy financial future.

They might choose not to pay off the mortgage in one lump sum, especially if the interest rate is low, but the money should be available so they won’t face the prospect of being forced to sell.

3. Education expenses

This calculation can be tricky because you need to consider the cost of college at the time your kids enroll. For instance, the average cost of tuition at public four-year institutions increased 20.8% from 2012 to 2023. For private institutions or out-of-state students, tuition rates are rising even faster.

While it can be hard to forecast where tuition rates will be by the time your kids apply to college, you can use today's numbers to calculate your policy coverage. Even after inflation, that number will at least be high enough to cover most of the tab.

4. Income replacement

Once you cover funeral expenses, debts and education, your family may not need to replace 100% of your income — and that’s where the hard part of the calculation comes in.

Even if you're the sole earner in your household, remember that you've already provided for debts and education. Your income replacement would just need to be enough to cover the remaining monthly expenses. If you're not the sole earner, you might not need to replace your income at all once debt and education costs are covered.

As a starting point, you can plan to replace half your salary, then translate this into a target lump-sum benefit by dividing it by 0.05.

For example, if you earn $100,000, divide $50,000 (half your salary) by 0.05, which works out to $1 million. That assumes the insurance benefits will earn 5% a year over the long haul, a conservative back-of-the-envelope figure.

Calculating your total coverage needs

Add all four categories to estimate how much life insurance is appropriate, then tweak the number to reflect personal circumstances. You might increase it if you don’t have a pension, but you could decrease your coverage if your spouse earns a substantial salary.

If you or a family member has a troublesome medical history, add $100,000 or even $250,000. If you’re the one with the medical condition, you’ll find it tough to buy additional coverage later at a price you can afford.

For most families, this exercise will work out to an amount in the high six figures, possibly even $1 million or more. But don’t be frightened. With term life insurance, boosting your death benefit by hundreds of thousands of dollars should only cost just a few hundred dollars a year.

Other factors to consider when calculating life insurance

A young couple with a toddler playing in a house they've recently moved into.

While these factors give you a raw number to start with, your actual coverage needs might be higher or lower depending on a few other factors. Here are some other key things to consider when calculating (or re-evaluating) your coverage needs.

Time

How many years will you need life insurance? If you’re in fine physical shape, you can buy a new policy and lock in the price for 20 years.

Some term policies come with the right to convert to a permanent life insurance policy, such as whole life insurance. You can keep this type of life insurance for the rest of your life, regardless of health. Premiums will be higher than for term life insurance at the beginning, but they usually remain level indefinitely.

The best reason to consider whole life or universal life insurance isn’t the accumulating cash value, although that’s part of the deal. The real issue is whether you’ll need coverage beyond 20 or 30 years — or after age 65 when term gets expensive.

You might want permanent life insurance, for example, if you need to protect kids with special needs who will always rely on you (or your estate) for support, or if you want to leave money to a school, charity or your children and you don’t expect to afford it any other way.

Major life events

Instances when you should seek additional life insurance coverage:

Getting married: Your new spouse might depend on your income even if he or she earns as much or more than you do.
Having a child: It takes a lot of money to raise a child — and it doesn't get any cheaper if you're not around.
Buying your dream home: When you settle into your family's forever home, guard against its loss in case tragedy strikes.
Nearing retirement This means no more life insurance from work. If you die, your spouse could lose out on pension and some Social Security income.

Type of life insurance

Term insurance is popular because many people can afford plenty of it, but it can make sense to combine term and permanent insurance with multiple policies or buy a convertible-term policy and make a series of conversions over the years.

One advantage of a convertible-term policy is that insurers don’t require a new medical exam when you make the conversions. That essentially gives you a pass if you gain weight, develop high blood pressure or even survive a bout with cancer.

Northwestern Mutual provided this example for a 27-year-old man who starts by paying $317 for $500,000 of term insurance, then gradually converts it to whole life $100,000 at a time. If you shift $100,000 to whole-life at age 28, your annual premium would jump to $1,300.

If you shift another $100,000 at age 31, your premium would rise to $2,600. Your premium would gradually increase whenever you shift money to the whole-life policy, topping out at $7,200 at age 40, for the entire $500,000 of whole-life insurance.

As long as the insurer remains strong and solvent, the cash value of your life insurance will rise every year, as will the death benefit. By age 65, in this example, the benefit is projected to be $990,000 and the cash value $475,000, which can be borrowed, withdrawn or tapped to keep the policy in force without paying additional premiums.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.