How Much Life Insurance Do I Need?

How much life insurance you need depends on what to accomplish by leaving the money to your loved ones.

Rachel H.

Published November 17, 2020.

When you buy life insurance, you’ll have to decide how much money you want your beneficiaries to receive from the insurance company when you die.

Your policy’s value depends on what you want to accomplish by leaving the money to your loved ones.

Life Insurance for Young Families

If you want to have enough life insurance to help support your partner and children if you die while your children are still living at home, your current household income can serve as a guide. 

A good start is to add up the outstanding balance on your mortgage, current debt, and household income times 10. 

Your numbers may look something like this:
Mortgage balance:
Annual household income, times 10:

You could round up and purchase $1,500,000 for each adult in the household, which would leave a cushion for funeral and burial expenses, college costs for your kids, and any other expenses. 

If you are in a committed relationship, it’s important to consider the household income instead of your individual incomes. If a stay-at-home parent dies, the other partner will have to hire help so they can continue to work. The partner who makes less money may contribute to the household in ways that can be difficult to put a price on.

Life Insurance for Recent College Graduates

You may think you don’t need much life insurance when you are just starting out in your career, but if you are young and in good health, your life insurance premiums will be inexpensive. Buy at least enough insurance to relieve your loved ones of the potential financial stress of having to pay for your funeral and burial expenses.

Add your debt, but remember that if you die, your federal student loans are canceled. If someone cosigned on any of your debts, add that to your policy so you don’t leave behind a financial mess. If anyone depends on you for financial support, add them as a beneficiary on your life insurance policy and make sure there’s enough money left after your debts are paid to continue to support them if you die.

Use a Life Insurance Calculator

As you work out a financial plan that includes life insurance, look for a life insurance calculator that you can use to explore various scenarios.

Your life insurance needs may change every few years. If you decide to start a family, add to your family, or your kids graduate from college, you may need more or less coverage.

Build in Flexibility

Add flexibility to your life insurance plan by purchasing several smaller policies with different terms.

You may want a 10-year term life insurance policy with a face value of $500,000 to provide for your teenage kids’ educational expenses. You could also buy a 20-year term policy to provide income replacement for your spouse. If the smaller policy you purchased five years ago isn’t enough to cover your mortgage and provide for your family anymore, add another policy to it instead of replacing the one that’s currently in force.

There isn’t a one-size-fits-all answer to buying the exact right amount of life insurance. With some careful calculations, you should be able to come up with a plan that offers you peace of mind. Your agent should be able to walk you through the next step: how to buy life insurance.