How Much Life Insurance Do You Need?

The first thing you need to do before buying a life insurance policy, is determine how much life insurance you actually need. We’re going to assume you’re between the age of 30 and 50 and considering a traditional, term life insurance policy which is inexpensive and provides your beneficiaries with a lump sum payment upon your death. Investment policies such as whole life, universal life, and variable life policies, are more complex, and often peddled by shady salespeople more interested in a hefty commission than the well-being of your beneficiaries. Here are some things you should consider when calculating how much term life insurance you’ll need. Keep in mind that other investments and savings can also help pay for some of these costs and that you will probably renew your policy more than once in your lifetime. So tweak your numbers accordingly.

  1. Funeral expenses:

    Your beneficiaries will most likely be able to get money from your insurance company before they get anything from your estate. Consider then working in an estimated cost for your funeral, which of course has to happen relatively soon after you die, into your insurance policy. Funeral and other burial costs generally total between $7,000 and $10,000, but research those numbers since costs will vary depending on where you live in the U.S.

  2. Mortgage:

    If you’re paying down a mortgage, include the amount of those payments in your insurance policy. Your spouse or family has the option of selling your home after you’ve passed of course, but they shouldn’t be forced to do so due to lack of planning on your part.

  3. Other outstanding debts:

    Are you paying off a school loan (or two or three)? Do you have pending payments on a car? How about credit card debt? A term life insurance policy can help take care of these costs, which otherwise will be paid for by your estate if it is solvent at the time you die. If you have children, consider possible upcoming expenses like college tuition, keeping in mind tuition costs will continue to rise for the foreseeable future.

  4. Income replacement:

    If you account for the expenses above, then your spouse and family probably won’t have to entirely replace your income. Consider then calculating half of your annual income times how many years there are before your retirement. Tweak this figure if your spouse holds down a well-paying job or if you are close to retirement and are anticipating a pension, social security, or other retirement benefits.

  5. Your employer benefits:

    Beginning in 2014, U.S. Health Care Reform will affect the kind of health insurance many employers offer their employees and some employers may choose not to offer any health care benefits at all. People without employer health insurance will receive subsidies to help with the out-of-pocket health costs. When calculating how much life insurance you need, take into account this changing landscape of health care coverage and the expenses your spouse and family may incur without your employer’s health benefits plan.