Figuring out how much life insurance you need can feel impossible. You want enough so your loved ones don’t have to worry, but you also want to keep costs down. Part of the calculation hinges on your lifestyle, goals, circumstances and family situation, so it’s different for everyone.
Luckily, it’s easier than you think to answer, “How much life insurance do I need?”
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Why Do People Buy Life Insurance?
Most people buy life insurance to protect their families from devastating financial loss. If something happens to you, your policy can provide financial security for years to come.
Some policies are meant to cover final expenses only, and those coverages are less expensive because they have a smaller death benefit. No matter your policy amount, buying life insurance can be an important tool to:
- Replace income for dependents
- Pay funeral and burial costs
- Pay tuition or education expenses
- Create an inheritance for your heirs
- Cover federal and state “death” taxes
- Make charitable contributions
- Establish a source of savings
Ultimately, your “why” behind buying life insurance can help you determine how much coverage you need.
Who Needs Life Insurance?
Now you know why people buy life insurance, but do you know if you really need it? Most people do — nearly half of Americans say they’d face financial hardship within six months if a wage earner in their household died unexpectedly, according to Life Insurance Marketing and Research Association, a leading industry trade group.
Despite the threat of financial difficulties, 102 million uninsured and underinsured people in the U.S. know they need life insurance coverage (but haven’t bought it).
To know if you need it, ask yourself just one question: Does anyone rely on your income or help for support?
If you have a spouse, child or aging parent who counts on your income, you need life insurance. But what if you don’t earn money but contribute to the household in other ways, such as childcare, cooking, cleaning or other tasks?
Stay-at-home-partners still need coverage. Your loved ones would likely need to pay someone to fill in for you if the worst should happen. Life insurance can help to cover the cost.
Also, even if no one directly depends on your income, consider how your loved ones will pay for your funeral, final medical bills and other estate expenses. These “final expenses” can run $19,565 on average in the U.S., according to Self Financial. If you don’t expect your estate to have enough assets to cover the full cost, consider a small policy, such as a Final Expense policy designed specifically for this purpose.
How Much Life Insurance Does the Average Person Need?
According to the American Council of Life Insurers, the average size of an individual life insurance policy is $178,150. But for many, that isn’t enough.
Think about this: the median household income was $79,900 in 2020, according to the U.S. Department of Housing and Urban Development. A $178,150 death benefit would cover less than two and a half years of lost income. What would your family do when the life insurance funds ran out?
But the amount of life insurance you need can be very different from what someone else may need. It depends on a few factors:
One of the most common reasons people purchase life insurance is to replace income. Your loved ones could struggle to make ends meet without your salary. If you’re the primary provider for your dependents, your policy should be enough to replace your income for a certain number of years.
You can use life insurance to pay off student loans, car loans, mortgages, credit cards, personal loans and other forms of debt. Making sure your policy is large enough to cover the balances can go a long way to providing financial security for your family after you’re gone.
But it might not make sense to add these into your life insurance calculations. If your income already covers the payments for these expenses, counting it again could needlessly increase the amount of coverage you need.
However, it makes sense if you want your beneficiaries to pay off the debts (rather than make monthly installments) after you pass away.
Whether you have dependents is a primary factor in how much life insurance you need. Generally, the more people who rely on your income, the larger your policy is (and the more life insurance costs).
But if no one depends on your income, a small policy that’s enough to cover final expenses may be all you need.
You may need a higher coverage amount depending on your financial goals. For example, if you want to cover outstanding debts and college tuition or provide an inheritance, you may choose to purchase a policy with a higher death benefit.
On the other hand, suppose one of your goals is to become financially independent. In that case, you may be able to save enough money that you don’t need life insurance at all.
3 Ways to Calculate How Much Life Insurance You Need
It’s time for the million-dollar question: how do you figure out how much life insurance you need? There’s no perfect calculation, but different methods can help you determine the policy amount that’s best for you.
Use a Life Insurance Calculator
The easiest and most obvious way to know how much life insurance you need is to use a life insurance calculator like The Ultimate Life Insurance Calculator. It does all the work for you.
To get a personalized coverage amount, you enter a little information about yourself, such as your age, gender, nicotine habits, height, weight, and the number of dependents.
Manually Calculate Your Life Insurance Needs
If you like numbers, you can calculate your life insurance needs manually. Grab a pencil and paper, and use this basic formula:
(Financial obligations you want to cover) – (savings and other assets that can be used toward expenses) = (Your life insurance amount)
- Financial obligations might include income replacement, a mortgage balance, other debts and college tuition.
- Existing assets might include a current life insurance policy (if you have one), money in your savings account, college savings accounts and pre-paid funeral expenses.
As you can see, this method can get confusing. You can use a life insurance calculator to determine your life insurance needs more quickly.
Estimate How Much Life Insurance You Need
A quick way to know how much life insurance you need is to estimate an amount based on your income. The rule of thumb is to multiply your income by 10. So, if you earned $68,000 per year, you’d need a policy for $680,000.
It isn’t a perfect method — it’s just an estimate. But it can usually get you in the right ballpark when thinking about life insurance.
Does Your Age Matter?
Age is more than just a number when it comes to life insurance. As it turns out, your age can be a key factor in determining how much life insurance you need.
Should you buy life insurance in your 20s?
If you’re in your 20s and don’t have any dependents, you might opt for a final expenses life insurance policy. You can get an additional policy later on and use the life insurance ladder strategy. It might look like this:
- You buy a $20,000 policy now to cover final expenses.
- If you get married, you buy a second policy to insure against income replacement.
- If you have children, you can buy a third policy to layer on top of the other two.
By laddering policies, you’ll end up with the right amount of coverage to cover your needs.
Should you get life insurance in your 30s?
Purchasing life insurance is smart when you’re in your 30s, especially if you don’t have another policy in place.
But you should buy a policy even if you have one through your employer — if you get fired, switch jobs or move to self-employment, your life insurance doesn’t go with you.
Should you get life insurance in your 40s?
Life insurance is good at any age. A midlife life insurance policy can be a good investment if you don’t have coverage or want to purchase more coverage.
Chances are good that someone relies on your income, whether it’s a spouse, partner, kids or aging parents. Making sure you have the right amount of life insurance is crucial to protecting those you love.
Do you need life insurance after age 60?
It’s never too late to buy life insurance. However, you may not need as much coverage by the time you reach 60 or older. For example, your mortgage may be paid off and your children may be out on their own, so they don’t factor into your life insurance needs anymore.
At this stage, consider a smaller policy to cover funeral and burial costs as well as other final expenses.
Next Steps for Buying Life Insurance
While there are numerous ways to answer, “How much life insurance do I need,” the easiest and most accurate option is to use The Ultimate Life Insurance Calculator. You’ll answer a few questions and walk away with a recommended life insurance amount based on your individual situation.
The best part? You don’t have to share your contact information. Go ahead — find out how much life insurance you need today!