How Much Life Insurance Do I Really Need?

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Jessica Fox 02-08-2021

How Much Life Insurance Do I Need?

How Much Life Insurance Do I Need - ConsumerCoverage

Although nobody wants to think about their inevitable passing, the one thing you should be thinking about is protecting your loved ones from paying out-of-pocket burial expenses–and if you have a young family, replacing your income. 

Taking the first step toward buying life insurance for yourself means calculating how much life insurance you should carry to cover your burial expenses, lost income and obligatory debts (car loan). Read on, and we’ll help you figure out how much life insurance you should carry.

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The Purpose Of Life Insurance

Life insurance is a type of insurance product where you pay premiums to your insurance company. Then, as long as you’ve paid your premiums at the time of your death, your family members receive a death benefit to cover final burial expenses.

There are two types of life insurance:

  • Whole: Whole life insurance covers you for life.
  • Term: Term life is life insurance sold in terms (like a 20-year policy) that some companies allow you to renew after the coverage expires. However, some providers require a medical exam upon renewal.

Who Needs Life Insurance?

Typically, the best time to lock into cheaper premiums is when you’re young, but it doesn’t mean you’ll pay exorbitant rates if you miss this window. However, the main factor in determining whether you should have life insurance is whether you need it, not necessarily age. 

So ask yourselves these questions to help hone in on whether you’re a candidate for life insurance:

  • Are you married?
  • Do you have dependents?
  • Do you have enough money to pay your debts and final burial expenses?
  • Do you own or co-own a business?
  • Do you have co-signed debts like student loans or loans out on the business?

All of these questions will help you assess whether you need life insurance. The area to emphasize is: do you have enough money to pay off all your debts and burial expenses; if the answer is yes, you may not require life insurance. On the other hand, if you prefer to have peace of mind that everything is taken care of, then having life insurance is the better option.

How To Determine The Minimum Amount Of Insurance You Need?

Take the guesswork out of figuring out how much life insurance is enough to satisfy your needs. Before we dive into the math, take a moment to plug in these common factors with figures:

  • Debt: Debts such as car loans, student loans, or personal loans still need paying if you’ve passed, so reserve enough money to cover all your debts (plus interest) — also, including burial expenses.
  • Mortgage: You may also want to cover the outstanding balance on the mortgage so your family can remain in the house.
  • Education Fund: Another common use of life insurance is allocating money to pay for your children’s tuition fees.
  • Income Replacement: If you have dependents, to calculate how much money they need to survive without you, multiply your salary by the number of years they need those funds to live comfortably. Also, include an extra year to account for inflation.

The above-mentioned are your financial obligations. Using these financial obligations, you can identify how much your minimum life insurance needs are. However, to calculate a more realistic life insurance value, add in these additional factors:

  • Savings: Amalgamate all your savings (retirement).
  • Account For Other Life Insurance Policies: If you’re fortunate enough to have more than one life insurance policy (consider this an asset), like supplemental life insurance through your work, subtract the value of your secondary policy from your life insurance needs.
  • 529 College Savings: Subtract your 529 savings account worth from your life insurance requirements.

From here to calculate your life insurance needs you:

  • Add Up Obligations: Add together debt, mortgage, education fund and income replacement — for stay-at-home parents, including the cost of child care.
  • Subtract Assets: Add up your assets (savings, 529 college fund, other life insurance policies); then subtract it from your obligatory amount to arrive at the amount of life insurance you need.

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Special Considerations

Certain circumstances warrant mentioning as they will affect your life insurance requirements calculations.

  • Special Needs Child: If you have a child with special needs, you may require permanent life insurance to care for them once you’ve gone.
  • Business-Owners: You may benefit from key man life insurance — which is insurance taken out on the business owner to help financially see the company through your passing.

How Much Life Insurance Is Enough?

Ultimately, if you need to purchase life insurance to take care of your family after you’re gone, the first step is taking the time to examine your financial obligations and how they compare to your assets. Then, once you arrive at how much financially you’ll need to protect your loved ones when you’re gone, all that’s left is buying the right life insurance policy!

Jessica FoxJessica Fox has been a freelance writer for five years, with a specialty in health, wellness, and insurance. During this time, she’s written for some of the biggest B2B and B2C brands from around the world. Jessica is also the mother of two young daughters and loves coffee, writing, and working out.