How much life insurance do I need?

Three strategies for calculating your term life insurance need.

How to calculate your life insurance needman-on-laptop-at-home

Once you decide to purchase a life insurance policy to protect the financial future of your family, the next logical question is how much is the right amount to buy?

While there are multiple strategies to determine the proper amount of coverage to purchase, let’s take a look at three ways that have proven to be extremely useful. Two are quick, while the other takes a little more time.

By following these simple strategies, you’ll have a better idea of your true needs and how much life insurance to apply for.

Strategy 1: Income multiplier approach

hand-holding-blue-coins-iconThe most basic way to decide how much coverage you need is to multiply your annual income (before tax) by 10 to 15 and use that total. If you have children, you should add 100,000 to that amount for each child’s education expenses.

For example, if you earn $50,000 a year, you’d buy at least a $500,000 policy.

Although this is the simplest way to estimate how much life insurance you need, it may not take into account all your needs or any special circumstances.


Strategy 2: Obligations minus assets

While the traditional way to measure how much life insurance you need is to multiply your salary by a specific number, it has been found that this strategy is not always the most accurate. For many families, there are other items to consider so a more detailed strategy is to add up your anticipated obligations and subtract your assets to get your total need.

The general formula looks like this: income replacement need + debts + education costs + final expenses – assets = anticipated life insurance coverage amount.*

Let’s take a look at those pieces one at a time...

1. Calculate income replacement need

For a majority of families, the most devastating financial impact of the death of a provider or loved one is the loss of annual income needed to pay for daily living expenses such as food, utilities, clothing, and childcare. To calculate your income replacement need, first determine the total number of years that the loved ones' income would need to be replaced. This number might be 5, 10, 15, 30, or more years based on a person’s age at the time of death and specific family situation. Then multiply the lost annual income by the realistic number of years it will be needed.

Income replacement need = annual income x number of years.*

2. Calculate debt obligations

When many people think of debt, credit card balances often come to mind. However, mortgages, cars, or student loans are real forms of debt as well. In addition to replacing a loved one’s annual income, thinking about the amount of outstanding debt a family has is another very important consideration. Be sure to calculate the amount of money it would take to pay off a house, car, and other obligations as you formulate your life insurance needs.

Debt obligations = mortgage + auto loan + credit cards + student loans + personal/other loans.*

3. Include education costs

Protecting a family from losing the ability to pay for education is another factor to consider when it comes to buying the right amount of life insurance. Future costs could come from private education, college or trade school, or even adult continuing education.

In 2021, noted the annual cost for a 4-year college education averaged $30,500 per year for both tuition, and room and board. And, average college costs have seen a growth rate of 6.8% each year over the last 20 years. The burden to afford these costs can weigh heavily on a family’s finances. As you think about how much life insurance you need to purchase, factor in the costs of education not only for the present but also later on.

Education costs = (years of need x annual education cost) x number of students.*

4. Include final expenses

Depending on the wishes of a family, the cost of paying for the final expenses of a loved one can vary quite widely. There are many options today to consider, such as a traditional burial or cremation. Recent statistics from the NFDA suggest average funeral costs range from $7,000- $10,000. When considering the amount of life insurance to purchase, taking into consideration the cost of final arrangements for a loved one is an important part of the process.

5. Subtract assets

Some families are fortunate enough to have acquired other assets in addition to their annual income. These additional financial resources could include savings or retirement accounts. If you happen to be in a position where these kinds of assets are available, you could consider lowering the amount of life insurance you purchase by this sum.

*These calculations are generalized and simplified for visual purposes only and do not include considerations for the time-value of the dollar, inflation, interest rates, annual charges, or fees.

Strategy 3: Online life insurance needs calculator

Another way to calculate your life insurance need is to use a basic life insurance calculator online. A guided coverage calculator tool works similar to strategy #2, but it handles all the math for you.

Our free tool can save you time and handle multiple calculations on one page. When you’ve completed your needs estimate and are ready to move on, you can easily shift to get a quote for term life insurance and your total need is added automatically.

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Our free online calculator tool saves time and does all the math for you.

Calculate your need

white-download-iconThe bottom line

There are several ways to calculate how much life insurance coverage to apply for, and in the end each one will be able to provide you with an estimate of your needs. You can decide how much coverage to get based on your income, you can balance expenses with assets, or you can use a calculator tool. Each person’s financial goals and lifestyle needs are different, so you’ll want to choose a strategy that makes sense for your family.

We're here to help

Sometimes you just want to talk to someone as you figure out how much life insurance to apply for. Our licensed insurance agents are more than happy to assist in any way we can. Ask us about how we can help customize your life insurance policy to get you the most affordable coverage for the time you need!

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