Determining Life Insurance Needs: How Much Coverage to Buy

You need life insurance. But how much of it do you need?

Life insurance is an important financial planning tool that can ensure your loved ones are taken care of no matter what happens to you. Most people understand the importance of coverage. Figuring out how much coverage to buy is another story. After all, you can’t really put a value on a person’s life. Luckily, calculating how much life insurance you need doesn’t have to be complicated.

So how exactly can you determine how much life insurance you need? There are two basic methods.

Method One

One way to calculate how much life insurance you need is to multiple your annual income by a reasonable number of years. People commonly use the number 10. If you earn $60,000 a year, you’d multiple $60,000 by 10 to get $600,000. That’s how much life insurance you need – maybe.

But what if you want the payout to last your family for more than 10 year? Maybe you’re just starting a family and you have two decades left on your mortgage. In this case, you might want to multiple your annual salary by a higher number, possibly 20 in this case. At $60,000 a year, that means you’d want a policy worth $1.2 million.

This is an easy method that works well for income-earners who want a replacement for their salary. However, using this method doesn’t always make sense. For example, retirees may want life insurance to cover their final expenses and protect their estate. Stay-at-home parents may want life insurance to make sure their children can get the childcare they need. In some situations, you’ll need to use another method to determine how much life insurance to buy.

Method Two

This method requires a little more work, but it can give you an accurate view of how much life insurance you need. Essentially, you add up all the money your family will need, and then you add up the money your family will have from other sources. The difference is how much life insurance you need.

  • The money your family will need may include various debts and expenses, such as funeral expenses, mortgages, other debts, additional childcare costs and anticipated college tuition for your children. You can also include your annual living expenses or lost income for the number of years you want covered.
  • Other sources of income might include the income earned by a spouse, pensions and any savings you have.

Avoid Going Too Low

Many people make the mistake of not getting enough coverage.

For example, you may think that a $100,000 policy is plenty. It sounds like a lot of money. But then you realize that about $10,000 will go to funeral costs. There may be significant medical costs as well, as well as mortgages and other debts. If anything is left, it won’t be much. Your family might be able to live off it for a little while, but probably not much more than a year or two. What happens then?

Calculating how much life insurance you need requires some estimation and guesswork. However, this doesn’t mean you should pull a figure out of the air. Make sure you’re getting enough to cover your family’s needs. At the same time, you shouldn’t just select a very high limit for no reason. Be ready to justify the amount of coverage you request, especially if it is unusually high.

Want to learn more? Discuss your needs with an Insurance Line One agent. Get a quote here.


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