How Much Life Insurance Do You Need?

Knowing how much life insurance you need is one of the most important first steps when looking to buy the right policy that best fits your needs.

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Knowing how much life insurance you need is one of the most important first steps when looking to buy the right policy that best fits your needs.

After all, not everyone needs the same life insurance coverage.

In most cases, your obligations, priorities, and situations are unique to you and the type of life insurance cover should exactly reflect that. In this guide, we'll show an easier way of determining the coverage amount that's right for you and your financial circumstances.

Death, just like taxes, is certain. Although most of us never like talking about death, it's inevitable that at some point we all have to leave the world.

And though we always avoid talking about the end of life, it's sometimes essential to think about what we leave behind for our loved ones when we're gone.

You certainly do not want to leave your loved ones struggling and perhaps unable to make ends meet when you're gone, especially if you were their breadwinner.

This is exactly where life insurance comes in handy. It's a great tool to ensure that your loved ones are well taken care of when you're gone and so it an important thing to consider.

Given its importance, one of the first things to ask yourself when looking for the right life insurance coverage is; "how much life insurance do I need?"

The golden rule is to get life insurance coverage that is 10 to 15 times the amount of your income. However, the amount of life insurance that you should have will vary depending on your personal and financial situation but the idea is to have enough money to cover your dependents' expenses now and in the future.

As you can see, this is, without a doubt, a question that needs careful consideration and planning.

You certainly do not want to feel uncomfortable at the prospects of leaving your loved ones with less. In this captivating guide, we'll help you try figuring out how much life insurance you need, how long it should last, and things to consider when shopping for the right life insurance coverage for you and your situation.

Table of Contents

What is Life Insurance and Why Do People Buy It?

Before looking at how much life insurance you need, it's crucial to know what life insurance is and why you may need it. Life insurance is a type of insurance coverage where the insurance company agrees to pay a particular amount of money to your dependents in a lump sum or as regular payments once you (the insured party) die provided that the premiums are paid and up to date. Life insurance is designed to reassure you and give you the peace of mind that your loved ones will be looked after when you're gone and no longer there to provide for them.

The amount of money that is paid out to your loved ones will depend on the type of cover that you buy. You also have the right to choose how the coverage is paid out and whether it should be used to cover particular payments such as college tuition, rent, medical bills, or mortgage. That being said, many people buy life insurance to cover their funeral expenses, supplement retirement income, transfer wealth, help pay off a mortgage, pay for college, provide home expenses, replace lost incomes, take advantage of taxes, and many more.

No matter the reason for buying life insurances, there are two main types of life insurances:

  • Term life insurance - It runs for a given time known as the ‘term' of your policy. This term of policy can be 5, 15, 20, 25, or 30 years. Your loved ones will only receive a payout if you die during the term of the policy. In short, this type of life insurance has an expiry date.
  • Whole life insurance policy - Your dependents will receive payout no matter when you die as long as you keep up paying the premiums.

Who Needs Life Insurance

Sure, life insurance seems like a great tool to ensure that your loved ones are well taken care of when you're gone. But is it appropriate for all of us? Like we said before, it may depend on your personal and financial situation. For example, buying life insurance may not make a lot of sense for those of us who love flying solo and do not have dependents, especially if they have enough to cover their funeral expenses, attorney fees, and other final expenses. The argument here is why should you bother buying life insurance if you don't have dependents who will reap the benefits. The same can be true is you have enough wealth and assets to ensure that your dependents are well set even after you die.

As such, you may not need life insurance if:

  • You're single and do not have dependents
  • Your dependents have more than enough to live on now and in the future
  • You are very low on income and your dependents can be eligible for state benefits

On the contrary, you certainly need life insurance if you're the primary provider of your loved ones and have debts that might outweigh your assets. Under such circumstances, life insurance will be of great importance in ensuring that your loved ones are well taken care of when you're gone.

You may, therefore, need life insurance if:

  • Your loved ones largely depend on your income
  • You have school-going children
  • Your debts outweigh your assets
  • You want to leave your loved ones in a much better financial position

So what's the Right Amount of Life Coverage for You?

According to data from Policygenius, many people in their 30s and 40s often buy life insurance policies that provide coverage ranging between $250,000 and $1 million. We, however, have to note that this is just statistics about what people choose to buy but the figures do not necessarily show that such amount of coverage is what you need or is ideal for your situation.

As we noted earlier, the right amount of life insurance for you depends largely on your personal and financial situation. For this reason, you can use these steps to find out how much life insurance coverage you need.

  • Add up your total resources including after-tax income and liquid assets
  • Calculate your financial obligations such as expenses and debts
  • Now find what's known as coverage gap, which is the difference between financial obligations and total resources

The amount of life insurance that is ideal for you (coverage gap) = Financial obligations - Total resources.

Here's a more realistic example:


Assume you're earning $70,000 after tax and have liquid assets totaling to $30,000, your total resources will be:

(After-tax income) $70,000 + (liquid assets) $30,000 = (Total resources) $100,000


When calculating your expenses, you have to factor in your kids' tuition fees, college expenses, about 7 years of expenses once you retire, your final/funeral expenses, pending mortgages, debts, credit cards, auto loans, and any other financial obligation. Hypothetically speaking, let's assume that these expenses tally up to $1.7 million.

The amount of life insurance that you need will, therefore, be the difference between expenses and total resources, which is 1.7million - 100,000 = $1.6 million. Ideally, this is the right amount of life insurance that you need to buy although your needs and obligations may change later in life. If it happens, the best thing to do will be to adjust your life insurance coverage with an insurance rider, which is technically a provision to your policy that can come at an added cost.

As you can see, you may want to simply calculate your ideal life insurance coverage by just multiplying your total resources or income by 15. For example, if your annual income is around $100,000, multiplying by 15 would give you $1.5 million and this could be your ideal life insurance coverage.

Factors to Consider When Buying Life Insurance

While your financial obligations are among the most important things to consider, there are other crucial factors to consider when looking for the right life insurance coverage. They include:

Your Age

One of the most aggressive things that life insurance agents use to determine the premiums you pay for your life insurance is your age. They tend to project that you missed the boat by failing to sign up for life insurance when you were young and may have to pay over the roof for life insurance when you're older.

Your life insurance premiums will indeed be a lot cheaper if you sign up when you're young than when you're older. It's a known fact that insurers make money by betting on how long you will live, so if you have life insurance but still die young, the insurer will have no choice but to payout.

No matter what the insurance companies tell you, you can get life insurance at any age as long as you can afford to pay the stipulated premiums. While it is much better to sign up for life insurance at a young age, do not let the insurers scare you into signing up by telling you that you won't get life insurance at old age. Of course, you can as long as you can afford the set premiums, so just do it when you feel it is the right time.

Again, keep in mind that your age should be a determinant of how much life insurance you should get. Instead, it should only be a determinant when it comes to how long you'll want the coverage to last. That being said, you'll need less coverage as you get older because hopefully you've cleared much of your debt and have fewer dependents to support.

Your Health

Just like age, your health can influence the premiums that you pay for your life insurance. You'll be more likely to get affordable premium rates if you purchase life insurance when you're still young and healthy. On the contrary, your premium rates may be a lot higher if you have serious health issues such as heart diseases, some forms of cancer, or health issues related to old age.

It's, therefore, important to get your life insurance going as soon as you can. Do not wait until you're old to start thinking about life insurance. Even though you may have cleared your debts and have fewer dependents to support, the premiums may be so higher and unattainable.

Can You Afford Life Insurance?

Many people often avoid this question when buying life insurance but it's as important as it gets. Believe it or not, a life insurance policy may not be of use to you if you cannot afford it. You certainly do not want to start paying premiums only to start defaulting later as this can be a recipe that your dependents may not receive the payout. In other words, defaulting on your premiums will mean that the insurer doesn't pay the payout and your previous premium payments will be lost. This is why it's very important to plan and budget on how you'll pay the premiums without failure.

You have to keep in mind that higher coverage amounts or large payouts will mean that you have to pay higher premiums. You should, therefore, decide whether to go with whole life insurance or term life insurance. Term life insurance may be a lot cheaper since you only have to pay the premiums for a specific time and then it expires.

On the other hand, whole life insurance can be about 15 times more expensive than term life insurance even though it will be active as long as you pay and do not default on the premiums. That being said, term life insurance can be the best option if you're on a budget. Nonetheless, the exact amount of premium that you pay largely depends on individual factors such as your medical history, driving record, and lifestyle.

It's also important to note that your life insurance payout will only be released when you die. So it doesn't matter if you can't provide for your dependent as a result of an illness or disability, there will be no coverage until you die.

Important Tips when Calculating How Much Life Insurance You Need

Here are some important tips to keep in mind when calculating how much life insurance you need.

Make it Part of Your Overall Financial Plan

Many people have been wondering whether or not to consider life insurance as a financial investment. Well, it all depends on how you look at it. For example, life insurance cannot be a great way of investing if you pay the premiums out of your savings program. Differently, it can be a great investment vehicle for those who do not have the discipline to save but still want to ensure that their dependents are well taken care of once they're gone.

Whatever your preferences, it's crucial to include life insurance as part of your overall financial plan. This plan should take into account your income as well as your current and future financial obligations. Look t the future college costs and your projected future income and assets growth. With that information, it becomes a lot easier to map out ideal life insurance coverage for you.

Buy a Little More

Instead of buying less life insurance coverage, it would make much sense to buy a little more life insurance coverage. While your income is more likely to increase as you progress in your career and life, so will your expenses. It may be impossible to exactly pinpoint what might happen in the future as far as your income and expenses are concerned but having more life insurance coverage is essential in ensuring that your dependents can maintain an appropriate lifestyle even after you die.

Talk the Numbers through Your Loved Ones

Whether it's your partner or older children, it's of great importance to get their perspectives in terms of how much they would need to get through when you're not around. Of course, your estimates should at least make sense to them.

Consider Smaller Life Insurance Policies

Your needs and expenses might increase as you get older so it's best to consider buying smaller but multiple life insurance policies instead of one larger life insurance policy. The idea here is to ensure that you have adequate life insurance coverage for your loved ones while also reducing the total premium costs. Remember, larger or bigger coverage can be quite expensive so going with smaller but multiple life insurance policies can be the best way to go.

This can work perfectly well with term life insurance. For example, you can buy a 25-year term life insurance policy to cover your children until they graduate from college and a 20-year term life insurance to cover your partner until you retire. This can be ideal if you want to build up your assets as you'll have plenty of time to build up and you'll be less likely to fall short of your responsibilities.

Schedule Regular Reviews

It's of great importance that you constantly review your life insurance policy, especially when your circumstances change. For example, it would be wise to update your life insurance policy if you get more kids or if you marry. Keep in mind that failing to review or upgrade your life insurance policy might leave you too little life insurance coverage and this may not be so good.

To this end, the importance of knowing how much life insurance you need can never be underestimated. Your main aim is to ensure that your loved ones are well taken care of when you die, so knowing the amount you need is the first most crucial step towards achieving this.

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