How Much Life Insurance Do You Need?

Posted April 22nd, 2019 by Amy Danise

There are simple ways to calculate how much life insurance you might need. And having that number in hand is an important first step in buying the right life insurance policy.

In general, you want to buy a life insurance amount that will allow your family to maintain their lifestyle.

How to quickly calculate how much life insurance you need

1. Add up the financial obligations you want covered by life insurance. This often includes:

  • The amount of income you want to "replace," which means multiplying your salary by the number of years you want to replace it. For example, if you make $80,000 and want your family to have the same income for 10 years, that’s $800,000.
  • Add the balance of a mortgage.
  • Add other large debts others would have to pay, such as large credit card debt.
  • Add anticipated college expenses for children.
  • Add the cost of a funeral.

2. Then subtract the existing assets your family could use for these expenses, such as savings, life insurance you already have, and 529 college-savings plans. (Some life insurance formulas include retirement savings among the assets to subtract. However, that could mean a spouse has to gut retirement savings to pay for daily living expenses, so we're not including it.)

3. The total is your estimated life insurance need.

Basic life insurance needs calculation

How much life insurance does a stay-at-home parent need?

Stay-at-home parents often provide substantial financial value to a family even though they don’t bring in a paycheck. So the loss of a stay-at-home parent can mean a large financial hit.

Life insurance can be used to cover the "replacement services" for a person. To calculate this, consider what you'd have to pay others to do tasks such as house cleaning and babysitting. This number is the life insurance need of a stay-at-home parent.

Help with calculating how much life insurance you need

  • Use online calculators: There are lots of free life insurance calculators online.
  • Ask a professional: An experienced life insurance agent can help you calculate your need.
  • Unique circumstances require special help: If your financial needs are more complex, a financial planner can help. For example, if you have a special needs child who will need lifelong financial support, a financial planner can help you structure a plan, give advice on a trust and find the right life insurance policy.

Other rules of thumb for calculating how much life insurance you need

Here are other methods that are sometimes used to calculate life insurance needs.

Annual salary x 10 Multiplying your annual salary by 10 is a quick way to guess at need, for sure. But the method doesn't address true financial obligations or the existence of assets that could reduce the need, like savings.

Human life value This method has multiple steps. It takes into account your future earnings based on salary increases. Then it subtracts your estimated income taxes and the living expenses spent on you. Then you select a rate of return (interest rate) on the remainder (this assumes your family invests life insurance proceeds and gets interest) and subtract that amount.

Here's a spreadsheet from the University of Northern Iowa that shows how to calculate human life value.

If your life insurance need looks like more than you can afford after you compare quotes, consider buying a smaller life insurance policy. A small safety net is better than none at all.

How long should you carry life insurance?

You should carry life insurance for as long as your death would mean financial trouble for your family (or business). For example, if your family relies on your salary, you might decide to buy life insurance that lasts until you retire.

The length of a term life insurance policy can be matched to your expected need.

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