Learn and Plan | How much life insurance do you need?
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How much life insurance do you need?

Apr 6, 2023, 4:42:37 PM | Reading Time: 3 minutes

Life insurance can be an important way for you to financially provide for your family if you were no longer here to support them. The recommended coverage is different from person to person, but several factors can help you estimate the amount of coverage that is right for you.

Support for your loved ones

If you have a family or other loved ones who depend on you, you may be considering life insurance to help create a financial safety net for the future. When determining how much life insurance you may need, you could factor in the cost of caring for dependents, such as your children or your parents. Think about the amount of money they would need to cover daily living expenses. Make a list of necessities like food, utilities, and medical costs, and consider adding in discretionary funding for vacations and other needs. To estimate the minimum amount of life insurance you may require, these questions can be a helpful place to start:

  • How much income would I like to provide if I were no longer here?
  • How many years after I’m gone will my family need my financial support?
  • How much debt would I like to pay off immediately?
  • How much would I like to provide for childcare?
  • Would I like to provide college funding for my children?
  • How much do I want to put into an emergency fund?

Funeral expenses

The immediate expenses following the loss of a loved one can often cause a great deal of financial stress. The average cost of a funeral is nearly $8,000, and can likely be more with additional items and services.1 When you have life insurance, your family can rest assured that these expenses are covered, adding a little peace of mind during an incredibly difficult time. Think about your preferences for a memorial service, burial /cremation, and cemetery to help estimate how much will be needed to pay for these expenses.

Paying off debt

When making your life insurance coverage calculations, the amount of debt you have is an important factor to consider. If you have outstanding debt, your family may become responsible for paying down these amounts after you die. This can include a mortgage, car loan, credit cards, student loans, and any other personal loans you may have. With sufficient life insurance coverage in place, your beneficiaries can use the benefit amount to help pay off this debt.

Funding college education

The cost of higher education for your children is also a consideration when deciding how much life insurance coverage you need. Tuition can be one of the largest expenses your kids will have, where the average in-state tuition at a public 4-year institution costs over $9,000 per year.2 This does not include additional expenses and costs of living, like room and board, transportation, books, and supplies. If your kids are currently enrolled or plan to attend college or a trade school, you may want to include these amounts when determining the amount of coverage that is right for you.

Your health and age

Your current age and health are common determining factors when deciding the type, amount, and cost of life insurance coverage. Typically, life insurance rates increase as you get older, since as you age, there’s a greater risk of death. This can be a good thing to keep in mind when deciding the best time to consider buying a policy. Certain pre-existing health conditions, like high blood pressure, diabetes, and high cholesterol, may also impact your eligibility and rates. Overall, the younger and healthier you are, the more affordable it usually is to get coverage, so don’t delay if financially protecting your family is at the top of your list.

Cost of a life insurance policy

When determining how much life insurance you need, experts commonly recommend calculating six to ten times the amount of your annual salary. This rule of thumb can offer a good starting point, but remember that every situation is unique and you will want to consider all your factors and goals before landing on a number. Since buying life insurance is an important decision, you may want to reach out to a financial professional as you start the process. He or she can be a valuable resource when determining the type of life insurance and coverage amount that can meet your needs and budget and ensure your family has the financial security they deserve. Want to learn more about why you should consider life insurance? Watch our video below.

1 Source: Nerdwallet.com

2 Source: Investopedia, 2021

The primary purpose of life insurance is to provide a death benefit to beneficiaries. Because of the uncertainty surrounding all funding options except savings, it is crucial to make personal savings the cornerstone of your college funding program. However, even a well-conceived savings plan can be vulnerable. Should you die prematurely, your savings plan could come to an abrupt end. To protect against this unexpected event, life insurance may be the only vehicle that can help assure the completion of a funding plan. In addition to the financial protection aspect of insurance, the tax-deferred buildup of cash values can be part of your college savings plan. Generally, if the policy is not a Modified Endowment Contract then tax-free withdrawals can be made up to the contract's cost basis. Moreover, if the policy is not a Modified Endowment Contract, then loans in excess of the cost basis are also tax free as long as the policy remains in force.

Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.


REV 8/2022