How Much Life Insurance Do I Need?

Factoring in Final Expenses and the Future of Your Family

by Sarra Jackson

There are a few things to take into consideration when deciding on how much life insurance coverage you need. The amount varies from person to person and can depend on how much their burial costs would be, how much debt they have, and how much they want to leave their family for other expenses they may incur from your death. There are decent life insurance calculators available online that you can use as a reference when deciding on a policy. However, it still takes a little common sense on your own when making this type of decision.

The main reason people take out life insurance is to ensure their loved ones will be able to shoulder the cost of any debt or expenses they may leave behind. Funeral costs alone can be $10,000 to $20,000 today. Your family will be able to cover the cost of your funeral with your life insurance benefits. Also, think of all the bills your loved ones will have to take care of. Since you may not know how much your bills will be at your time of death this is going to be an estimated cost. The amount of debt you’re in, including a mortgage, and the average cost of monthly bills are things to remember. Also, life insurance helps loved ones live the life they are accustomed to. Leaving a spouse who lives in a four bedroom home in an upper middle-class neighborhood may mean they can’t afford to stay their without your income unless your life insurance policy can cover the cost. These are all things to consider when deciding how much life insurance you need.

If you have children you will want to think about their education. College expenses are constantly on the rise, about 5% each year. It is recommended that you look at the cost of college today and decide if you want your life insurance policy to cover some or all of the cost and add that amount to your life insurance calculation.

Income replacement is another area to keep in mind when calculating life insurance. After funeral expenses, debt, and family are taken care of they won’t need to replace 100% of your income. However, the amount you choose varies greatly and depends on the person. Some experts recommend covering 50% of your current pretax earnings until retirement. An example of this is if a person makes $100,000 a year they will divide $50,000 by 0.05%, which comes out to be $1 million. The majority of families will get an amount that is in the high six-figures. However, you will only be expected to pay a few hundred dollars each year when you choose term insurance for this amount.

While it may not be something you want to think about, taking out a life insurance policy is the responsible thing to do. You can lock in low monthly premium rates when you’re younger and healthy, often for 20 years. There are many different life insurance policies available that let you choose the right amount of coverage for you.