Mother with child after figuring out how much life insurance she needs.

6 minute read

A Guide to How Much Life Insurance You Need

Learn what should be accounted for when determining life insurance coverage and how to manually calculate how much life insurance you need.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Financially providing for the people you love the most is both one of life’s biggest responsibilities and most rewarding experiences. Unfortunately, there’s only so far your current income can be stretched. At some point, your cash position won’t be able to take care of your family. The financial needs of everyone you care about ultimately persist, even after your unfortunate passing.

Instead of leaving your loved ones with nothing, taking out a life insurance policy can provide a much-needed financial legacy. Life insurance awards policyholders the ability to continue caring for the people they love the most upon their death. The resulting “peace of mind” is invaluable, which leaves anyone considering buying life insurance with one simple question: How much life insurance do I need?

There is no universal answer to the question, but this guide was designed to help you identify the amount of life insurance that’s right for you. Please continue reading if you are interested in learning how to manually calculate how much life insurance you need. This guide will tell you everything you need to know to do it yourself, including:

Do I Need Life Insurance?

While the concept of life insurance looks great on paper, the truth remains: life insurance isn’t for everyone. Whether or not you need life insurance is entirely dependent on your personal situation; not everyone wants or needs it. 

The most common reasons people consider taking out life insurance policies include, but are not limited to:

  • Replace missing income: The majority of households in the United States rely on multiple streams of income. In fact, it is safe to assume any household that loses income to the death of a loved one would need to replace the loss of an income stream with life insurance. A death benefit awarded to beneficiaries could replace said income for years.  

  • Fund end-of-life expenses: One of the most common reasons people buy a life insurance policy is to fund the expenses resulting from their own passing. Funeral and burial costs, for example, may prove too costly for loved ones who just lost a portion of their income. A life insurance policy may help cover the expenses, and then some.

  • Financial legacy: Some life insurance policies have the ability to leave behind an inheritance for beneficiaries. Specifically, a life insurance policy’s death benefit can leave a financial legacy for loved ones.   

  • Donate to charity: Life insurance policies don’t have to name dependents or loved ones as beneficiaries. In fact, it is entirely possible to name a nonprofit organization or charity as the beneficiary. Many people open a life insurance policy to make one final donation to a cause they care deeply for.

  • Protect a business: A life insurance policy may be used to fund business expenses in the event the untimely passing of the policy holder disrupts operations. 

  • Diversification: Permanent life insurance policies coincide with a cash component. Over time, the cash associated with the policy can grow tax-free. The growth typically occurs at a fixed or money-market rate, offering a relatively conservative return on investment. Some policies even allow their holders to invest in other investment vehicles like stocks and bonds.

  • Take care of estate taxes: Beneficiaries named in a Will may face steep estate taxes on their inheritance. Instead of paying out of their own pocket, however, a life insurance policy may cover the impending taxes levied by the estate’s assets.

If you fall under either of these categories, you should strongly consider taking out a life insurance policy, which begs the question: How much life insurance do I need? Let’s take a look at everything you’ll need to consider when learning how to manually calculate how much life insurance you need in the next section.

How Much Life Insurance Do I Need?

Life insurance is the perfect compliment to any inheritance, providing heirs, beneficiaries, and dependents with the financial security they deserve. With so much on the line, however, how much life insurance do I need? That’s a difficult question to answer, but not impossible if you follow the advice outlined in this section.. 

While there’s no single number to account for how much life insurance anyone needs, there are certain obligations that can guide you towards a more specific answer. Therefore, instead of settling on a specific amount, compile a list of any remaining debt obligations that would be passed on to loved ones at the time of your death. Generally speaking, you’ll need enough life insurance to fulfill any of the costs (or financial hardships) brought about by your remaining debts.

In order to make sure your passing doesn’t pose a financial threat to your loved ones, a life insurance policy should be able to cover the following:

  • Remaining debt obligations: A life insurance policy should at least cover any remaining debt obligations. That way, you won’t saddle your beneficiaries with any debts they can’t handle. Debts to consider include the usual suspects: credit cards, medical bills, and other outstanding balances. The idea is for the beneficiaries to be able to pay the remaining debts with the money they receive from the policy.

  • Missing income: A life insurance policy should account for the loss of income resulting from the death of the policyholder. That’s not to say the policy should replace lost income for the rest of the dependent’s life, but rather for the remaining years they would have relied on the policyholder’s earnings.

  • Mortgage payments: A death benefit should be enough to cover the policyholder’s mortgage payments. Doing so not only protects beneficiaries from having to pay what is most likely the policyholder’s largest debt obligation, but also protects real property from having to be sold during the basic estate planning process.    

How to Manually Calculate How Much Life Insurance You Need

Learning how to manually calculate how much life insurance you need isn’t rocket science. While it is slightly more complicated than your standard math problem, anyone can do it. Instead of guessing “how much life insurance do I need,” try following the steps outlined below:

  • Multiply your annual salary by number of years that number would need to replace

  • Calculate the amount needed to pay off your mortgage

  • Add up any other debts

  • If you have children, estimate the cost of education for each

  • Estimate funeral expenses

  • Add all these numbers together

1. Multiply your annual salary by number of years that number would need to replace

More often than not, life insurance is used to replace lost income. As a result, you will want to determine how many years of income you want to replace. A policy should replace income for as many years as dependents would have relied on the policyholder's earnings. Once you have identified the amount of years you will need to supplement, multiply it by your annual salary. 

2. Calculate the amount needed to pay off your mortgage

Unless you are lucky enough to have already paid off your house, you will want to make sure your beneficiaries have enough money to take care of remaining mortgage payments. In doing so, simply check your remaining mortgage balance and add it to the equation. If, for example, you have a remaining mortgage balance of $100,000, you will want to make sure your beneficiaries can pay it off with the money you leave them in a death benefit.  

3. Add up any other debts

When learning how to manually calculate how much life insurance you need, the most difficult step isn’t even a calculation at all; it’s gathering all your debts in one place. You will need to create a list of all your debts: Credit card bills, medical bills, car payments, and any other financial obligations that will remain after your passing need to be accounted for and added to the equation.   

4. If you have children, estimate the cost of education for each

Anyone planning on taking out a life insurance policy should strongly consider adding the cost of education to their plan. It is common for beneficiaries to depend on policyholders for more than cash and cash equivalents. Whether it is college or similar educational expenses, policyholders can add the amount they expect to spend on a future education to their plan; that way, the dependent won’t have to front the money themselves. 

5. Estimate funeral expenses

Most life insurance policies cover impending funeral expenses. While each funeral is different and each policyholder will have their own wishes, burial costs are expensive. On average, funeral and burial costs will set loved ones back about $8,000. Instead of relying on the average, research how much you expect to spend on your own funeral and add it to your policy.   

6. Add all these numbers together

How much life insurance do I need? The answer should be enough to cover all of the expenses listed above. The idea is to provide a financial safety net for your loved ones, which begins with giving them enough money to cover your own financial obligations. Therefore, add up all of the costs in steps one through five to come up with a starting point for how much life insurance you should have. 

What about term life insurance vs whole life insurance?

When asking yourself “how much life insurance do I need,” you must account for the type of policy you take out. If for nothing else, not all policies are created equal. 

Term life insurance, for example, only covers a predetermined time frame. Typically, term policies cover 5, 10, or 20 year periods, and allow policyholders to lock in their premium rate and death benefit for the duration of the term. Beneficiaries will only receive the death benefit if the policyholder dies before the term expires. Whole life insurance, one the other hand, covers a policyholder’s entire life. The death benefit will be distributed to named beneficiaries no matter when the policy holder passes away, as long as they are up-to-date on premium payments.  

The amount of life insurance you need will change depending on the policy. Whereas whole life policies will typically rely on the calculations above, term life insurance policies will revolve around personal situations. If, for example, you need a policy to be able to replace your income until your children attend college, you may only need a 10-year policy (give or take a few years). If, however, you want a life insurance plan to cover a mortgage, you may need to account for a thirty-year period. Either way, determining how much you need will depend on the individual circumstance calling for life insurance.

Life Insurance Calculator

Learning how to manually calculate how much life insurance you need is as simple as following this equation:

All remaining debt obligations + Years of supplemental income (multiplied by your annual salary) + Future educational expenses + Funeral expenses & burial costs + Mortgage payments = How much life insurance you need

Instead of asking yourself “how much life insurance do I need,” start making a running list of all the expenses you expect to remain after you pass away. At the very least, a good life insurance policy will cover each and every one of those expenses, so your beneficiaries don’t have to. Others may choose to add more to their policy if they need to provide multiple years of lost income their beneficiaries were relying on. There are also more variables to account for, but the equation above should be a good starting point for most people.

Make sure life insurance is factored into your plan

The simple answer to the question “how much life insurance do I need” is enough to cover any debt obligations that will be around once you are gone. Again, the idea of life insurance is to both prevent your own debts from burdening loved ones and to give them some added financial security upon your passing. Therefore, learning how to manually calculate how much life insurance you need is as easy as adding up all of your existing debt obligations, funeral costs, and years of lost income your loved ones were counting on. The resulting number should give you a good idea of how much life insurance you need. 

Here at Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement options today! 

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