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How Much Life Insurance Do You Really Need?

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Deciding how much life insurance to buy is a tricky decision. Your needs and those of your family have so many variables that it’s hard to establish a set guideline.

Life Insurance

There are a few guidelines, however, to use when calculating your own coverage amount. These guidelines can help you come to a good number that will protect your family while limiting your costs.

Here are six questions to ask in order to calculate how much life insurance you really need.

Question 1: How Much Do I Make?

The most basic rule of thumb with life insurance is that you should purchase a policy for 10 times your annual salary. And this is a good starting point.

Take into account your base pay, as well as any annual bonuses or commissions that you may bring in. If you have a side hustle that regularly makes extra money, you may want to add that into your number.

Also, keep in mind that this number accounts for replacing your salary for 10 years. You may want to replace it for longer, though.

Maybe you have small children and you want your spouse to be taken care of until the kids are on their own. In that case, multiplying your salary by 12, 15, or even 20 might be a better choice for your family.

Question 2: How Much Do I Owe?

If you were to pass today, how much debt would you leave behind? Take this into account when calculating your life insurance coverage.

Will someone inherit your home, or do you own it jointly? Either way, you may want to include the balance owed on the mortgage in your life insurance calculation.

When you die, a joint home owner must continue to pay the mortgage. If you are the sole owner, the mortgage stays with the property as it passes to the beneficiary. Including the mortgage balance in your life insurance coverage is a good idea. Even without a mortgage, you may want to account for property taxes, homeowner’s insurance, and other expenses so that your heirs don’t bear those financial burdens.

If you have credit card debt or other debt, you may want to also include that in the calculation. If those balances are cosigned, the other person will be responsible for the debts upon your death.

Credit cards are unsecured debts. This means that if you die and your estate doesn’t have money left over to pay them off, the credit card company is out of luck. However, if your spouse is a joint account holder, they will now be responsible for the remaining balance. You should also include any high interest personal your significant other will be forced to take on.

Lastly, you’ll also want to account for your final expenses here. Funerals are not cheap, and they’re often an unexpected expense that could easily eat up your family’s emergency fund (and then some).

The average funeral costs around $10,000. Depending on your last wishes — such as hiring Celine Dion to sing at your funeral or having your ashes spread ceremoniously on each of the seven continents — this may need to be adjusted. It seems morbid, but planning to pay these costs out of your life insurance is important.

Question 3: How Will My Family’s Life Be Impacted?

Think about how your passing would impact your family. This includes your value outside of the money you may bring in.

This is particularly true for stay-at-home parents. While they don’t usually have an income (aside from a side hustle or part-time gig), their value to the home is significant. If you are the full-time childcare for your children and take care of most of the household management, you’ll need to account for your partner having to replace those services.

What if you’re a working parent in a two-income household? You still may want to add additional money to allow your spouse to pay for extra childcare and help with household chores if they become a single parent.

Whatever cost you come up with for these additional, unpaid services, be sure to multiply that by the number of years you want to cover.

Question 4: Will My Loved Ones Need Health Insurance?

If your family is currently covered by a health insurance plan provided by your employer, that will disappear upon your death. Depending on what your spouse’s employer offers, your family may not have an affordable health insurance alternative.

What if your spouse’s employer offers a comparable health insurance plan to what you already have? If they would likely keep working if you pass away, you may not need to add the cost of health insurance to your coverage number.

However, if your family will need to purchase private health insurance, shop around a bit to get an idea of cost. The monthly premiums are not insignificant! Figure out how much a policy will run, and add this expense — times the appropriate number of years — to your life insurance coverage.

Keep in mind that your spouse and dependent children will be eligible for COBRA coverage upon your death if you were already receiving health benefits through your employer. This coverage can last up to 36 months. It is still a pricey option, however. And private insurance (if your spouse will not qualify for a new plan under an employer) will still be in their future.

Related: All About COBRA Coverage

Question 5: How Much Do I Need to Consider for College Expenses?

If you have children, you may already be planning for their college expenses by contributing to a 529 plan or other savings vehicle. You may want to account for the remaining funds needed in your life insurance coverage, though, as a way to remove that burden from your loved ones.

Setting aside $80,000-100,000 per child for education expenses is a general, but solid, number. This covers four years of tuition, room & board, and books at the average public college. Depending on how much you already have saved, your children’s ages, and their existing plans for the future, you may want to adjust this up or down.

Question 6: What Are My Existing Assets?

When calculating all of the numbers above, be sure to factor in everything that you’ve saved already. This may include savings accounts, funded college accounts, investments, and even other life insurance policies.

If your family will be able to draw on these assets, subtract them from your overall coverage needs. However, one should account for when these assets can be accessed.

For instance, if your spouse will be able to collect Social Security survivor’s benefits, you can account for that when calculating how much of your income to replace with insurance. However, keep in mind that your spouse won’t be able to receive benefits until they reach at least age 60, unless you have children under 16 years of age or have a child with a disability.

As With Most Things, It All Depends

It’s easy to throw in all of the things that could be covered by your life insurance policy. And when you’re talking about $500,000 or $1,000,000 policies (or more!), the zeros can make your head spin.

Of course, you don’t want to waste money each month by overpaying for coverage that is far beyond what your family needs. However, you also don’t want to pinch pennies and leave them with a policy that falls short.

In the end, you’re really just making an educated guess as to how much life insurance you really need. The questions above are great for determining your family’s baseline needs, though your own unique situations may impact this number. As with most personal finance situations, the ideal amount of coverage really depends on many factors. And, in the end, you would still rather err on the side of caution and purchase a too large policy, rather than a too small one.

Play around with the numbers and solicit your spouse’s opinion, too. Figure out how long you want, or need, to care for your family’s finances after your death. This is particularly important for families with a child with lifelong needs.  Then, once you have your magic number, you can shop around for the best policy price.

There are several resources you can use to get free quotes online. One of our favorites is Haven Life.

Published or updated August 9, 2017.

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About the author

Stephanie is the managing editor at Consumerism Commentary, as well as a contributing writer. She graduated from Baylor University with a Biology degree, but has since found a passion for personal finance. She also writes for a number of other sites -- including Dough Roller, Five Cent Nickel, and allCards -- in addition to running her small business, Pink Orchid Press. Stephanie lives in Washington, DC with her two sons and a German Shepherd. View all articles by .

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