How much life insurance should you have?
Buying life insurance provides a financial safety net for your family. There are quite a few things to consider when calculating how much life insurance you should buy.
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?
There are two main types of life insurance: term and permanent.
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.
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.
The type of policy you need depends on your situation. 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.
Life insurance FAQs
When should you get life insurance?
The best time to buy life insurance is whenever you determine there’s a need. 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 less 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.
When should you buy life insurance?
The younger you are when you buy life insurance, the less you will pay. It's important to consider what you might need life insurance for in the future and buy as soon as possible, even if you don't think you need life insurance right now. You'll pay more if you wait, and buying sooner will reduce the risk that a future health problem will make it hard to get coverage down the line.
Can you change life insurance coverage later?
You may be able to increase or decrease your insurance coverage, depending on your policy, after initiating it.
“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.”
You may also be required to provide evidence of insurability if you want to get additional coverage.
Is life insurance through an employer enough?
Supplemental life insurance provided through an employer can be a convenient way to get life insurance coverage, but it may not be sufficient. You should consider an individual life insurance policy separate from employer coverage because you may not be able to keep your group life insurance if you leave your job.
