How Much Life Insurance Do I Need?

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UPDATED: 2021-04-21T19:30:31.235Z
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Life insurance will provide for your loved ones financially in the event of your death. A comprehensive policy can cover the cost of burial or funeral expenses, help to pay off remaining debts, and fund your family's day-to-day expenses after your passing.

You may be wondering, "How much life insurance do I need?" It's a good question. Most insurers will tell you that your policy should be six to ten times your annual salary.

There are many other factors to consider, however. You should tailor your policy to your unique needs. This guide explains what factors to consider when buying a life insurance policy.

What Is Life Insurance, Exactly?

Life insurance is a contractual agreement between you and an insurance company. You agree to pay a monthly or annual premium as long as you are alive. In exchange, the insurance company agrees to pay out your beneficiaries after your death.

The amount the insurance company pays depends on the details of the policy you've purchased.

Just what does life insurance cover? Beneficiaries may use life insurance for the following:

  • End of life expenses

  • College costs

  • Outstanding debts

  • Child or dependent care

  • Everyday expenses, like rent, utilities, groceries, and household essentials

Beneficiaries choose how they want to spend the money. There are no restrictions on how they can use the cash.

That said, the insurance company may withhold the benefit in cases of possible fraud. Insurance fraud is a breach of contract.

Also, life insurance doesn't cover all types of death. Insurers almost always cover homicide, accidental death, and death by natural causes.

In some cases, an insurer may not cover suicide. Many policies include a suicide clause period. Until that deadline has passed, the insurer will not cover suicide. This is to minimize insurance fraud.

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Types of Life Insurance

Before answering the question, "how much life insurance do I need," we need to discuss the different insurance options. There are two types of life insurance: whole and term.

Whole Life Policy

A whole life policy is a type of permanent life insurance. The insurance company will cover you for life (assuming you continue to pay the premiums on time).

In some cases, you can use a permanent life policy as an investment. How? It builds cash value over time. You can then take premiums and invest them into the market.

Term Policy

Term life insurance only covers you for a specific period. You might choose a 20-year term or a 30-year term, for example. After this time expires, the life insurance expires.

In some cases, you can renew a term policy after the expiration date. However, some insurers require a medical exam to renew the policy.

Which is Better, Whole or Term Insurance?

It depends on your needs and personal situation.

Term life insurance tends to offer cheaper premiums. While that is positive, there is the drawback that if the insurance policy expires, your loved ones are not going to receive any cash. Also, you cannot use term life insurance as an investment like you can whole life insurance.

It is possible to outlive your term life insurance policy and need to renew it or choose a new policy.

Do You Need Life Insurance?

You came here wondering, "How much life insurance do I need?" The first question you should ask yourself is whether you need life insurance at all.

Your situation significantly impacts the need for life insurance.

If you are single and do not have any dependents, your need for life insurance is minimal. But if you have a family to support, including a partner and children who rely on you for day-to-day money, life insurance is vital.

Factors to Consider When Deciding on a Life Insurance Amount

As a rule, the larger the life insurance sum, the higher the premiums you will have to pay.

At a minimum, you should get enough life insurance to cover your outstanding debts and remaining financial obligations. Most insurance companies recommend a life insurance amount that ranges from six to ten times the policyholder's annual salary.

However, that's not a hard-and-fast rule. When answering the question "How much life insurance do I need?" you need to consider your unique situation. Here's what to think about.

The Amount of Debt You Have

As mentioned, your beneficiaries can use life insurance to pay off their remaining debts. This might include personal loans, mortgages, credit cards, car loans, and student loans.

Sit down and make a list of all your debts. Tally them up and take a look at that figure. Your life insurance policy should have enough coverage to pay off that amount completely.

For example, if you have a $100,000 mortgage and a $10,000 car loan, you should have a policy of at least $110,000.

You also need to factor in interest, however. You will have to take out a little more to settle extra interest charges and fees.

Income Replacement Requirements

This factor is significant if you are the primary breadwinner in your family.

Let's say you make $80,000 per year. You support your partner and one child with that income. If you pass away, you want to make sure your partner and child have the funds they need to survive.

You will need a policy payout that can replace your income. You need to consider how many years of coverage your loved ones will need.

Finally, you have to think about inflation. A salary of $80,000 will have less buying power ten years from now.

The Age and Number of Dependents

When considering income replacement needs, it's essential to factor in the number of dependents and their ages.

If you have a family of five, they will need more money than if you are leaving behind a single partner. The younger the dependents are, the greater their financial need will be.

If you have children, you should also consider their educational needs. Do you want your life insurance to cover their college or university tuition?

Your Age

Your age is another factor that impacts your life insurance choices. You can take out life insurance at any age. This is not a product that is only for elderly individuals.

It's wise to get life insurance when you are young.

Why's that?

First off, you never know what can happen. It's best to be safe. Also, you may qualify for lower premiums while you are younger.

In general, insurance is cheaper for younger individuals. This is due to the simple fact that a young person is at lower risk for specific health ailments that might result in mortality.

Your age is also a factor when deciding between term versus whole life insurance. If you are older, a term policy may make more sense.


Inflation is the rate at which a currency's value falls. This is why goods and services get more expensive over time.

What sounds like a lot of money to you now may not be worth much in 20 years. You should think about how inflation will change the value of your life insurance.

This is especially important if you are hoping that coverage will extend to young kids for many years.

Critical Illness

You may be able to add a critical illness cover to your life insurance policy.

What is this?

It kicks in if you are seriously ill or injured and can't work as a result. Examples range from cancer to heart disease.

A critical illness cover can bring you and your family added peace of mind thanks to the added protection it offers. However, beware that you will have to pay more for a critical illness premium.

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An Example Calculation: How Much Life Insurance Do I Need?

Now, you know what factors to consider when answering this question. However, an example can help bring added clarity.

Let's say you are the sole provider for your family. You earn $50,000 per year. This supports your partner and two kids.

Your policy payout needs to replace that lost income. It also needs to guard against inflation.

You have to multiply that lost income by the number of years you want your loved ones to receive coverage (for example, until your kids turn 18). This is the bare minimum you need.

You also have to consider the other factors mentioned above. For example, say you have a mortgage on your house worth $250,000 and credit card debt totaling $20,000. You need to add this $270,000 total into your coverage.

Then, say you want your two children to be able to attend college without worrying about costs. You also have to look at tuition fees and factor those in.

The Risks of Insufficient Life Insurance and Coverage Gaps

If your policy lacks coverage to help your loved ones for a sufficient period, they will struggle financially. You don't want that to happen.

The question at stake is, "how much life insurance do I need?" However, the amount of life insurance is only part of the problem.

You also have to make sure that there are no gaps in your coverage.

Coverage gaps happen primarily because of policy lapses. If you do not pay your premiums on time, your insurer will deem your contract void. They can then cancel your policy.

Again, this will leave your loved ones struggling financially.

How to Avoid Coverage Gaps

To avoid this, you should pay your premiums within the 30 day grace period given. This will prevent a policy lapse.

If you are unable to pay your premium on time for any reason, talk to your insurer. In some cases, you can get an extension on the grace period.

Note that during the COVID-19 pandemic, many insurers have extended this grace period. Instead of 30 days, insurers bumped it up to 90 days. Some states, like New York City, made this mandatory.

If your life insurance policy will expire, make sure to explore other coverage options well in advance. You should start your research at least six months before your current policy expires.

You can also opt for temporary life insurance coverage. This ensures that your beneficiaries still get money if you die during the insurance application process.

What If You Can No Longer Afford Your Life Insurance Coverage?

If you are unable to afford your premiums, it is possible to decrease your death benefit amount. In turn, the cost of your premiums will drop.

Lowering your coverage does not pose a risk to the insurer. Life insurance companies do not require additional underwriting to decrease the death benefit.

This situation is not ideal because it leaves your loved ones with less money when you pass away. However, something is better than nothing.

Life Insurance Alternatives

If you do not have dependents and want a life insurance policy primarily to cover your debts, there are other options.

Credit card companies and banks are now offering insurance deductibles on outstanding balances. This might add up to a few dollars a month. In the case of your death, the policy will pay that debt in full.

If you take this route, make sure to subtract that debt from any calculations you make when deciding how much life insurance you need. You don't want to end up paying double.

Review Your Life Insurance Regularly

The answer to the question "how much life insurance do I need?" may change over time. The amount of coverage you need could go up or down.

If your children grow up and support themselves, you may need less coverage. Alternatively, if you are a new parent, it may be time to up your insurance coverage.

Many other factors impacting your coverage needs can evolve as well. You may take out new debts — or pay off debts. Your salary may increase or decrease.

Also, you may need to update beneficiaries if you get married or divorced (or remarried). The amount of coverage isn't the only point that may fluctuate.

The point is that your situation may change. Your life insurance policy should probably change with it.

When shopping around for life insurance, make sure to consider the best life insurance companies in your area.

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