How Much Life Insurance Do You Need? 4 Key Driving Factors To Know

by Hank Coleman

You need life insurance. I think that we all know that and understand that. We may not like that fact, and we definitely do not want to talk about it. But, we do in fact acknowledge that we need life insurance.

The real question comes in when deciding how much life insurance we need. How much life insurance do you need? Like most financial decisions, there is a lot of things that go into making it. Here are the factors that you should consider when formulating the amount of life insurance that you need to buy.

recent study by LIMRA and the LIFE Foundation found that almost 49% of the survey’s respondents said they had no life insurance. This was despite their acknowledgement that it was an important part of their family’s financial planning.

And, a vast majority of the survey’s respondents said that they felt that they did not have enough life insurance coverage. In fact, only 22% of U.S. households said that they had seriously shopped for life insurance in the past two years.

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Most sited confusion over the cost of life insurance, the type they needed, and how much life insurance coverage they needed as to why they still had not purchased new or additional coverage.

Flags for the Fallen

You Need 10x Your Annual Income

One rule of thumb that many financial experts recommend is having ten times your annual income in life insurance benefits. So, for example, if you earned $50,000 per year before taxes, you would want to have a $500,000 life insurance policy to protect your family from a loss of income from your untimely death.

You have to remember that the true reason for life insurance is to protect the loss of income for your family and loved ones who depend on your earnings to survive. In theory, with ten times your income, a surviving spouse or family could save the insurance benefit, invest it, and live off the interest which would provide a yearly or monthly stream of income much like your salary does for them now.

You would especially need to ensure that you have enough life insurance benefits that would payout to your spouse if he or she did not work outside of the home. Additionally, you should consider insuring your wife if she is a stay at home mother despite not having an earned income.

It would be extremely detrimental to your family to have to hire people to take care of your children or complete the other household task that a stay at home spouse usually attends to. Far too many women do not have adequate life insurance coverage. This is of course the same for a stay at home dad as well.

You can also use a Life Insurance Calculator to give you a ballpark figure as to the amount of life insurance coverage you may need. They have several tools to help you not only find out how much life insurance do you need but also ways to find space in your family’s monthly budget to fund your life insurance premiums.

Do You Still Owe Money On Your Mortgage?

If you still have an outstanding balance on your home mortgage, you should add that amount to your life insurance coverage as well. For example, if you had a $500,000 life insurance policy to protect the lost of your income, you would also need that amount plus the remaining balance on your mortgage in life insurance coverage. Then your estate could pay off your debt with the life insurance benefit and not burden your family with it after your gone.

Are Your Children In College Or About To Go?

Do you have children who are currently in college? Do you have children at home that are still school aged and will need to attend college in a few years? This is another prime consideration for how much life insurance coverage you need.

You should take into account how much a four year degree is estimated to cost you to put your children through college. That cost needs to be added to the amount of life insurance coverage you purchase in addition to the amounts covering your debts, mortgage, and income replacement.

What Other Debts Do You Have?

Like a mortgage, you should add any debts to your life insurance policy. You should not take out specific life insurance or riders for certain debts, but you should add the total amount of debt that you owe onto what you need to insure to replace your income.

This applies to all debts such as credit card balances, home equity lines, student loan debt, car notes, and the like. You should not saddle your heirs with your debts and bills. You should have enough life insurance benefits that your estate can clear your name and then continue to pass your assets to your heirs according to your will and last wishes.

There are so many factors that go into the decision about how much life insurance do you need. Not only do you need to consider having enough life insurance coverage to replace your income should you die prematurely, but you have to also have enough death benefit that will cover the repayment of your debts.

The last thing that you want to do is leave your family in a bind after you are gone because you did not decide how much life insurance do you need by taking into account these simple factors and planning accordingly.

Remember: Everyone’s situation is different. These are simply guidelines. You should also seek out the advice of a qualified life insurance agent to help ensure that you have enough life insurance coverage and the adequate type of insurance to meet your needs and the needs of your family.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 586 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 8 comments… read them below or add one }

Sarah Park

Choosing the right insurance to secure family’s welfare whatever might happen to us should really be planned carefully. We can’t just afford to leave our loved ones behind, especially the kids penniless. Thanks for this post.

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Roger @ The Chicago Financial Planner

Hank and excellent post! I can’t tell you how many times that I’ve spoken with a young couple with young kids and they are hyped up to invest or buy some real estate but the bread winner has no life insurance and they have no will in place. Your analysis was right on, frankly I generally start with suggesting $1 million on the primary earner and go up from there. Life insurance can be an inexpensive way for a family to build an estate until they accumulate sufficient assets down the road.

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Kevin Watts

Good post. I honestly have not thought of getting life insurance just yet. I am not married but one day once I start a family I will look into this more thoroughly. I have family who is in the insurance business that would definitely help me set this up.

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Amy @ JobCred CV Builder

Great post. Ten times the annual income is reasonable indeed. How are the benefits of permanent life insurance and term life insurance differ?

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John S @ Frugal Rules

Good post Hank! I think far too many people overlook life insurance, especially at a young age. We fall in the not having enough on my wife, but are working on bringing that up to where we would like it to be. We also have a rider on our mortgage that would pay off the house in the event of an accidental death.

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The College Investor

We took all of our debts, then added 5 times each of our incomes. That way the survivor would be debt free, and then still have a nice chunk of change to make things happen.

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Yash Verma

Hi,
Very informative site. It is very effective & helpful for me.
Thanks….

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Reply

Sandi @ Spring Personal Finance

What average consumers forget to do BEFORE they go shopping for insurance is sit down with their budget (their real one, based on what they actually spend, not the one hiding on a spreadsheet somewhere in the dark recesses of their hard drive) and figure out exactly what they would have to spend money on should they or their partner die.

Go through the exercise for each person and their income. What are the necessities? The nice to haves? Figure out how much money you HAVE to have each month, and then figure out how much money you’d have to have invested (at a shockingly low rate of interest like 2%) in order to replace the hypothetically dead person’s income.

THEN go shopping for insurance.

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