How Much Life Insurance Should You Have? Top 7 Factors to Consider
Life insurance is an important investment that helps you protect your loved ones in case of unexpected incidents. That’s why you might have asked yourself how much life insurance you should have.
Here, we’ll break down how to choose the right life insurance policy for your family and financial circumstances.
What Is Life Insurance?
Life insurance is an agreement between you and an insurer that provides financial security to your family, (including your spouse, children, and/or parents) in the event of your unexpected death.
With term life insurance, you pay a fixed monthly rate for a period of time (usually 10 to 30 years). If you pass away during that time, your family will get a tax-free cash payment. They can use this money to pay for expenses they’ll need to cover in your absence.
What Does Life Insurance Cover?
Life insurance covers costs like:
Medical insurance and bills
Funeral expenses
Existing debt
College tuition
Living expenses like food, rent, and utilities
How Much Life Insurance Should You Have?
Life insurance plan payouts provide anywhere from $20,000 to $10 million, depending on your financial eligibility, the type of plan you choose, and how much you pay each month.
But when it comes to how much life insurance you should have, it’s important to consider these seven factors:
Debt: When you pass away, some debts (like student loans) are forgiven and your family won’t have to pay. However, if anyone cosigns a loan or credit card with you, they’ll be responsible for the bill after you pass away. Make sure your life insurance plan covers any credit card bills, mortgage payments, or loans (like for a car) that your beneficiaries will be obligated to pay.
Recurring expenses: Factor in the monthly expenses your family will need to cover in your absence. This may include rent, utilities, car payments, groceries, and insurance payments.
Children and dependents: Your plan should be tailored to your unique family situation. If you have young kids, consider the cost of raising them over time. You may want to increase your policy to ensure they’re cared for in your absence. But if you have children who are older and self-sufficient, you may not need as much coverage. You should also factor in the cost of caring for your parents, if you are (or will be) responsible for them as they age.
Current income: If you pass away unexpectedly, your life insurance should offer your family the same security that your current income provides. Determine the number of years your family would need extra financial support (for example, until your youngest child graduates high school), then multiply that number by your annual income.
End-of-life expenses: Did you know that burial and funeral services average $10,000? Make sure your plan has an extra cushion to cover those expenses. A good rule is to add an extra $10,000 to $20,000 to your plan, because this will only increase your monthly rate by a few dollars.
Cost of education: Estimate how much it will cost to send each of your kids to college. Your life insurance can cover their tuition costs, relieving them of student loan debt.
Liquid assets: Add up how much cash your family will be able to convert from your liquid assets. This includes things like stocks, savings accounts, college funds, and additional life insurance plans. You’ll use this to find your coverage gap, something we’ll explain a little later on.
Life insurance shouldn’t be a financial burden. There are affordable policy options available (Stride even offers some!), so estimate your needs and then opt for a policy that suits your budget.
Stride tip: If you can’t afford the policy you want right now, consider buying a smaller life insurance plan. You can later add on extra, smaller policies as your needs evolve, like if you become an empty nester or your income changes.
How to Find out How Much Coverage You Need
Once you’ve mapped out your family’s expenses, subtract the value of your liquid assets. The remaining amount is your coverage gap. This is the amount your life insurance policy should provide for your family in case of an emergency.
Expenses – Liquid Assets = Coverage Gap (Policy Amount)
Let’s try out an example:
Max is a 35-year-old graphic designer with a wife and a ten-year-old child.
Monthly expenses: $351,000
(Mortgage: $400) + (Debt payments: $100) + (Utilities: $75) + (Groceries: $300) + (Health + Dental Insurance: $100) = $975
$975 x 12 Months x 30 Years (retirement age (65) - current age (35)) = $351,000
Future expenses: $590,000
Income: $480,000
Annual income ($60,000) x 8 years (until child graduates)
College tuition for one child: $100,000
Funeral expenses: $10,000
Liquid assets: $20,000
Savings account: $10,000
College fund: $10,000
Coverage gap:
$941,000 (Monthly Expenses + Future Expenses) - $20,000 (Liquid Assets) = $921,000 Ideal Policy Amount
