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How Much Life Insurance Do I Need?

Life insurance can provide a financial safety net for your surviving family members after you die.

But even if you’ve purchased a policy, the amount of insurance you have might not be enough to cover your family’s long-term needs.

In a 2022 study by industry researcher LIMRA, 44% of households surveyed said that it would take less than six months to feel financial hardship after the loss of a primary wage earner. 

Figuring out exactly how much coverage you need can be tricky, but there are formulas you can use and factors to consider determining what’s right for you.

How does life insurance work?

A life insurance policy guarantees that an insurer will pay a set amount of money to the policyholder’s beneficiaries when that person dies, in exchange for the policyholder paying the cost of premiums while still living.

Should I get life insurance?

Life insurance can provide important protection for some, while others may not need it at all. You may need a policy if you meet these criteria:

• You have dependents who would considerably lack financial resources if you died.

• You would like to pay for your burial without tapping into the assets you plan to put in your will.

• Your debts and taxes exceed the sum of your liquid assets, including property, cash, and investments.

• You intend to leave a legacy gift to a charity or cause you would like to support after you die.

Formulas for how much you need

There are a few different formulas that can help you calculate the right amount of life insurance coverage to buy.

• Multiple of salary approach: Some experts suggest multiplying your pre-tax salary by 10 — or however many years of income you want to provide — then adding $100,000 for each child you have. Keep in mind this formula does not account for inflation.

• 1% income rule: Your premiums should total about 1% of your annual income to ensure an adequate amount of coverage.

• DIME method: You can determine how much coverage you would need by adding up these amounts:
         • Debts you still owe

         • Income multiplied by how many years you want your income stream to continue

         • Mortgage amount remaining

         • Education costs for your children

• Human Life Value Approach: This involves calculating your lifetime income potential, based on your current salary and how much you expect to earn in the future, and then factoring in your age, profession, benefits and expected working years.

What to Consider for a Life Insurance Policy

Term versus whole-life policies

Term life policies: These provide payment to beneficiaries for a set period, such as 10 or 20 years after the insured person dies. These policies generally offer lower premiums, but the longer the payout term, the higher the cost.

Whole life: These policies are based on a fixed premium and guarantees a minimum rate of return on the investment. Universal life policies are a type of whole-life policy that offers the option of increasing the death benefit or adjusting premium payments.

Multiple policies

There is no rule that says you can’t have multiple life insurance policies. In fact, having more than one policy can offer you additional peace of mind. According to LIMRA, 68% of life insurance owners surveyed reported feeling financially secure, compared with 47% of non-owners. But those who feel the most secure, 78%, were people purchased life insurance through both the workplace and through individual coverage. Associations and credit cards are other common sources of life insurance policies. The one caveat is that there’s a limit to how much total coverage you can carry at once, usually 15 times your income.

Gender gap

There’s a clear gender gap when it comes to life insurance coverage, and women continue to be underinsured compared to their male counterparts.

First, the values of women’s policies are substantially lower than those of men. Men with life insurance carry policies worth twice as much as women do, according to a 2019 survey by online life insurance agency Haven Life.

Women are also less likely to even purchase life insurance to begin with. According to LIMRA’s research, just 46% of women report owning life insurance, compared with 53% of men. Among those women, 1 in 5 (22%), said the reason they don’t have coverage is because they don’t know how much or what type to buy.

Contributing to the underinsurance trend is the fact that women live longer than men, with the U.S. Centers for Disease Control estimating a life expectancy of 80 years for women, compared to 75 for men. The upshot is that life insurance policies tend to be less expensive for women because they live longer.

The bottom line is that it’s important for women to recognize their worth and purchase their life insurance policies accordingly.

Age

Life is less expensive the younger you are. But remember: Age has no bearing on whether you’ll be able to obtain a policy. Insurers rarely refuse to provide coverage to someone who is willing to pay for it. So even though you may pay more for a policy if you’re older, you should always be able to get coverage, no matter how old you are.

Income sources

It’s common for families to have income from sources other than life insurance after the death of a spouse or parent.

Social Security survivors’ benefits can be a significant source of income for surviving spouses, school-age children, and other dependents.

Other income may come from pension plans with a death component, for example.

Life insurance as an investment

If you have a life insurance policy that builds cash value, this can help you build capital that accrues interest. The key is to check the policy’s rate of return and risk levels before you use this as an investment strategy; you could earn better returns in the market, depending on your rate of investment.

Funeral Costs

The national median cost of a funeral was $7,848 in 2021, and the median cost of a funeral with cremation was $6,971, according to the National Funeral Directors Association.

Family expenses

Along with mortgage and education costs, consider what other expenses will your surviving family members will have, such as utilities, food, and other bills.

Minimum amount of life insurance

Burial insurance, also known as final life expense coverage, is typically one of the smallest policies you can buy, with benefits starting at about $5,000. But it’s important not to confuse the minimum policy amount with the minimum protection you will need for your family. 

How to Choose a Life Insurance Policy

Your personal and financial circumstances and your family’s needs should ultimately dictate how much life insurance coverage you need.

An insurance agent, certified financial planner or estate planning advisor can help guide you in choosing a plan that best fits your needs.

Once you’ve obtained life insurance coverage, make sure to let your beneficiaries know about your policy and plans.