How much life insurance do I need?

How much life insurance should you have?

When choosing the right amount of life insurance, consider the financial resources available to your family if you die and their current and future financial needs. The difference between those two numbers is the amount of life insurance you need to purchase.

Consider your financial resources

Think about what kind of financial support will be available to survivors after your death, including existing life insurance policies and alternatives to life insurance like stocks and savings.

"For simplicity, ponder three categories of resources: Social Security and other retirement-related survivor benefits; group life insurance; and other assets and resources," says Mark Friedlander, director of Corporate Communications for the Insurance Information Institute. "It's also important to know when these resources will become available. For example, Social Security survivor benefits are payable immediately to a surviving spouse with dependent children but only after age 60 if there are no children."

Think about current and future financial needs

Forecast what financial needs your survivors will have after your death. Think about all of these financial areas:

Final expenses (funeral and burial costs, probate and other estate administration costs, and medical expenses not covered by health insurance)
Debts, including credit cards, mortgages, car loans, student loans, and personal loans
Income and living expenses
College tuition for your children

Once you know what kind of financial protection your family will need, you can move to the next step.

Subtract financial resources from financial needs

Now that you’ve thought about your family’s financial resources and needs if you die, you can determine the size of the life insurance policy you need.

"Many people are underinsured, often because they skip these steps or take a shortcut, such as simply buying a multiple of their annual income," Friedlander says.

Life insurance calculator

If you're not sure how to calculate the amount of life insurance you need, our life insurance calculator can help.

This free tool offers life insurance needs analysis. All you need to do is estimate your debts, income, and a few other factors, and you'll get an estimate of how much life insurance you need and what type you should buy.

Remember that this is an estimate; you should always speak to a financial advisor.

What is the minimum death benefit you need?

There is no minimum death benefit that applies to everyone. It depends on how much of the financial need you want to provide for in the event of your death.

Some don’t feel they need life insurance at all, while others want only enough to cover their funeral and burial costs. That can be covered by an affordable special permanent life policy known as final expense insurance.

Others want to pay off all debt or college tuition for their children. The life insurance calculator above will help you determine the minimum amount you need to buy based on what you want to cover.

What type of life insurance do you need?

Choose the type of life insurance that best suits your needs. Term life is best for people with short-term financial needs, while permanent is better for those who want to ensure lifelong coverage.

Term life lasts for a specified period, such as 20 or 30 years. These policies are usually more affordable than a permanent life policy and are designed to provide coverage when you need it most. Choose term life if you need a larger death benefit that is available for a specific period, such as until your children are adults.

A permanent life insurance policy is for life, as long as you stay current on your premiums. Permanent life policies include whole life, universal life, and variable life. These policies build cash value, allowing you to tap into the policies while alive. Choose permanent life insurance if you have a long-term financial need, such as providing for a disabled child, or want to ensure your final expenses don't burden your family.

For most people, a term policy is the best choice. You’ll get more coverage for your money and only pay for it during the period when you need it, for example, when you are raising your children. However, permanent life insurance may be the right choice if you have a long-term need for coverage. Speak to a financial advisor or life insurance agent to ensure you choose the right policy for your needs.

FAQ: Life insurance needs

When should you get life insurance?

You should buy life insurance as young as possible, as soon as there is a financial risk to someone else if you were to die. If you expect that other people will depend on your income or if you have debt that you will carry on after your death, now's the time to consider purchasing life insurance, says Friedlander.

The younger you are when you begin coverage, the lower your premiums. Life insurance companies differ in how they set rates, but one way to get cheaper rates is to buy a policy when you're in your 20s or 30s.

Can you change life insurance coverage later?

Yes, some policies allow you to make changes to your death benefit or purchase additional coverage at a later date. A guaranteed insurability rider allows you to increase coverage later. You may be required to provide evidence of insurability if you want to get additional coverage.

“The guaranteed insurability rider, also known as the guaranteed purchase option rider, provides the option to increase coverage in the future without evidence of insurability.” says Professor Siwei Gao of Eastern Kentucky University. “This can be an attractive option for young couples with limited resources.”

Most term policies can also be converted to permanent coverage, if you decide later you want to keep the coverage beyond the term.

Is life insurance through an employer enough?

No. Life insurance provided through an employer is a convenient way to obtain coverage, but it is usually a small amount, and you will lose the coverage if you change jobs, in most cases. Individual life insurance allows you to choose the correct death benefit and ensure it's in place when you need it.