How Much Life Insurance Should I Have? 7 Factors to Consider

how much life insurance should i have?

Life insurance is an important investment that helps you protect your loved ones in case of unexpected incidents, and you’ve probably asked yourself, “How much life insurance should I have to protect the people I love?” You’ll want to choose the right policy for your family and financial circumstances, but don’t worry – this guide shows you how.

What Is Life Insurance and What Does It Cover?

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 10-30 years). If you pass away during that time, your family will receive a tax-free, cash payment. They can use this money to pay for expenses they’ll need to cover in your absence, such as:

  • Medical insurance and bills  

  • Funeral expenses

  • Existing debt

  • College tuition

  • Living expenses (e.g. groceries, rent, utilities)

How Much Life Insurance Should I 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.

When calculating how much life insurance is best for your family, there are so many things you could think about or want to cover. Be sure to at least consider these top seven factors:

  1. Debt: When you pass away, some debts (like student loans) are forgiven. 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 (e.g. for a car) that your beneficiaries will be obligated to pay.

  2. Recurring Expenses: Factor in the monthly expenses your family will need to cover in your absence. This may include rent, utilities, groceries, and insurance payments.  

  3. Children and Dependents: Your plan should be tailored to your unique family situation. If you have young children, consider the cost of raising them over time; you may want to significantly increase your policy to ensure they’re cared for in your absence. Alternatively, 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.

  4. 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 (e.g. until your youngest child graduates high school), then multiply that number by your annual income.

  5. 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 of thumb is to add an additional $10,000 or even $20,000 to your plan; this will only increase your monthly rate by a few dollars.

  6. Cost of Education: Estimate how much it will cost to send each of your children to college. Your life insurance can cover their tuition costs, relieving them of burdensome student loan debt.

  7. 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 significant financial burden. There are very affordable policy options available (Stride has access to plans as low as $6 / month!), so estimate your needs and then opt for a policy that suits your budget.

Inside Tip → If you can’t afford the policy you want right now, consider buying a smaller life insurance plan. You can add additional, smaller policies as your needs change, like if you become an empty nester or your income changes.

Doing the Math

Once you’ve mapped out your family’s various expenses, subtract the value of your liquid assets. The remaining amount is your coverage gap, and it’s 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

Interested in finding an affordable life insurance policy for your family? Explore simple, straightforward options for free here – no fees or upsells, ever.

Aly KellerComment