How To Know How Much Life Insurance You Need

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Determining how much life insurance requires evaluating your financial responsibilities, dependent’s needs, current and future expenses.

Use this step-by-step guide to get a rough estimate of how much life insurance you need:

Step 1. Evaluate Your Financial Obligations 

• Outstanding debts: Review your outstanding debts including mortgages, car and personal loans, and credit card debt. 
• Funeral expenses: Factor in funeral expenses: Funeral expenses could range from $6,000 to $10,000.

Step 2. Account for Income Replacement

• Current income: Review your current income and the number of years your family would need support. Account for any special circumstances that your family may need coverage for. 

Step 3. Plan for Any Future Expenses

• College expenses: If you have children, budget for college expenses. 
• Other additional expenses: You may want to include medical expenses, aging parents or future weddings. 

Step 4. Review Current Assets

• Savings and other assets: Take into account your current savings, investments, and other assets and retirement funds. 

Step 5. Make a Rough Calculation

• Add up total coverage: Add your total financial obligations, future expenses and income replacement. 
• Subtract existing assets: Subtract existing assets and deduct that amount from the total coverage needed. 

This calculation will help you arrive at a rough estimate of how much life insurance you will need. 

Other Calculation Methods

Here are a few other methods to calculate how much life insurance you will need:

10x approach

Multiply your annual income by 10 to get an estimate the amount of coverage you will need. For example, say your salary is $60,000 a year.

$60,000 x 10 = $600,000.

You’ll need $600,000 to make up for the loss of your salary for ten years.

DIME Approach

• Debt: Add up all your debts.
• Income: Estimate your income replacement amount.
• Mortgage: Include remaining mortgage balance.
• Education: Evaluate the cost of education for your children.

This is a quick way to determine your largest expenses and liabilities.

Types of Life Insurance Policies

After you calculate the coverage you want, that can help you narrow down the policy that will give you what you want:

Factors that Determine Life Insurance Coverage 

Life insurance coverage is determined by multiple factors that can impact the type and amount of the policy you choose. These are the common factors:

• Age. Younger people will lock into lower rates on a life insurance policy. The assumption is that a younger person is relatively healthy and will not become sick in the near future.
• Health. Some preexisting conditions may cause denial of life insurance or require higher premiums. 
• Occupation. Professions like construction workers, pilots and firefighters face more risk on their job. Their premiums will likely be higher than someone who works in an office. 
• Hobbies. Activities like bungee jumping, skydiving and smoking substantially increase your risk resulting in policy restrictions and higher premiums. 

Mistakes To Avoid When Buying Life Insurance

Here are some common mistakes you want to avoid when considering purchase of life insurance coverage:

• Don’t underestimate the amount of coverage you need. Consider replacement income as well as future expenses like caring for aging parents, college education costs and debt repayment. 
• Choose the right policy. If you’re unsure about the policy you need, consult with a financial pro. 
• Don’t wait too long to purchase life insurance. The younger you are, the more likely you will be able to secure a lower premium. 
• Do not wait to review your life insurance. Regularly review your life insurance policy. 
• Designate the right beneficiary. Don’t forget to add the right beneficiary information. Update beneficiaries accordingly. 

Final Take 

When deciding how much life insurance you should get, have a keen understanding of your financial obligations, income, dependent’s needs and potential future expenses.

Determine what type of insurance policy works, and calculate your life insurance based on your budget. Make sure you talk to a financial pro if you need guidance, and be sure to review your life insurance policy regularly. 

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