How much life insurance do I need?
A common rule of thumb for life insurance is to purchase a face amount of 7-10 times your annual income. But that doesn't take into account your unique financial situation. A better approach is to take the total value of your available assets and subtract from that your financial obligations:
Current financial obligations – Assets = Coverage amount
Your calculated life insurance coverage amount represents the anticipated financial gap between your loved ones' funds and their potential expenses over time. The policy you purchase should have a death benefit of at least this amount, if you can afford it. With term life insurance, you can typically choose a coverage amount starting at $100,000 and up, depending on your budget and what you qualify for.
What should I consider before I buy life insurance?
Life insurance to cover a mortgage and other financial obligations
A financial obligation includes any financial debt or commitment you owe to another party. Consider how much of the financial obligation you'd like to support your loved ones with via life insurance if you were to pass away. For example, you can determine how much life insurance you'd need to:
- Cover your mortgage: The money your life insurance provides can ensure your family can continue making mortgage payments or pay off the mortgage entirely.
- Cover other debts: This includes private loans and credit card debts that your family will need to take over.
- Pay for ongoing child expenses: The average cost of raising a child from birth to age 17 is an eye-popping $233,610, according to the USDA. That doesn't include the cost of college.
- Pay for your end-of-life expenses: Funeral costs are typically around $10,000 or more. Life insurance can help make sure your loved ones have enough to cover yours. Calculate your funeral expenses to help determine how much coverage you'd need.
- Make a legacy gift and financial cushion: While not an obligation, if you intend to leave something behind for your kids or grandkids, or donate to a charity, life insurance can help support your goal. You can also add more coverage simply to give your family more savings for once you're gone. Learn more about how to donate your life insurance to charity.
If something happens to you, ensuring your family has enough money to pay the bills and keep up with basic living expenses is paramount. As long as you have an active policy, the beneficiary (or beneficiaries) listed on your life insurance policy will receive a lump sum payment or annuity they can use however they like. Learn more about life insurance beneficiaries and life insurance annuities.
Assets to consider when purchasing life insurance
An asset is anything of monetary value that you own, benefit from, or have use of to generate income, such as:
- Savings and investments: The money you've accrued in your personal bank accounts, stocks, bonds, mutual funds, or any inheritance you received.
- Retirement savings: The money you've invested for retirement, usually through an employer or other organization (IRAs, 401(k) plans, Social Security). Learn more about life insurance and retirement planning.
- Any existing life insurance policies: Current policies that will be paid to your family if something happens to you.
Pro tip:
Use our life insurance calculator to better understand the different scenarios and how much life insurance is right for you.
Other important factors affecting life insurance policies:
Here are some other situations and circumstances that could affect the amount of coverage you consider when shopping for life insurance.
Are you or your spouse a stay-at-home parent?
Life insurance for a stay-at-home parent can help cover costs if something unexpected happens to them. Paying someone to handle day-to-day tasks, such as childcare, meal preparation, transportation, grocery shopping, laundry, and more may be necessary so the surviving parent can continue providing for the family. In terms of coverage amounts, buying a policy roughly half the size of the working partner's policy can help (carriers might approve that amount based on the income of the employed spouse).
Do you have group life insurance?
Some people have group life insurance through the company they work for. But in many cases, it's not enough to cover the average person's needs.
Some group plans give you the option to buy additional coverage to supplement your policy. These supplemental life insurance plans may let you buy coverage up to three or four times your annual salary. Keep in mind that most people change jobs over the course of their careers and, in most cases, you lose coverage issued through your company when you leave.
How to balance coverage and costs
While buying enough life insurance is important, remember not to buy more than you can afford for the length of the policy. While life insurance is less expensive than most people think, there are a few things you can do to lock in the best price.
Don't wait to buy. It's usually better to buy sooner rather than later, since life insurance costs tend to increase as you age. Plus, if you develop a health condition, getting covered will be even more expensive or you may not qualify for coverage at all. It's never too early for life insurance, so the smart move is to buy more coverage now if you think you'll need it later, so you can lock in a lower rate from the start.
Compare quotes. This can help you find better rates for the same amount of life insurance coverage, so it's worth shopping around for life insurance to get the best quote for your needs.
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