How Much Life Insurance Do You Need?
Unless you’ve amassed sizable assets and savings that can support your family when you’re no longer around (if that’s you, kudos!), you need life insurance.
You’re probably nodding your head in agreement. You’ve no doubt heard about the benefits of life insurance and understand the need for it, but there’s one question that often stops someone from taking the next step before buying a policy: “How much life insurance do I need?”
We can start answering this question by identifying your personal reasons for buying term life insurance.
What Can Life Insurance Pay For?
Life insurance isn’t just for paying your final expenses. It’s a tax-free benefit that your beneficiaries can use for a variety of things, such as:
Unless you’ve won the lottery (congratulations!) or inherited a windfall, chances are you have some debt. In fact, the average U.S. household carries a debt of $137,063, according to USA Today.
Mortgages, student loans, credit card bills, and financed vehicles are all major sources of debt — and that debt doesn’t always disappear after you’ve passed on. Upon your passing, your debt now becomes the responsibility of your estate, so any assets you’ve left behind for your heirs may be at risk to pay off your debt. Worse, if you have cosigners on any of your loans, they’re on the hook for your debt.
And if someone has cosigned one of your loans, guess what? That debt becomes their problem (uh-oh).
Whether your household is dependent on one income or two, a life insurance policy can replace lost income for as long as you’d like.
Even if you have a group life policy through work, it’s often not enough coverage and buying additional coverage is more expensive than buying your own personal policy. Plus, if you only have life insurance through your employer, you run the risk of a coverage lapse if you leave your job.
If you’re your family’s breadwinner, your loved ones will feel the financial impact of losing your income. But you need life insurance even if you’re a stay-at-home mom or dad.
Your children need to be taken care of while the surviving parent continues to work to pay the bills. Childcare, housekeeping, chauffeuring, cooking… all of the tasks that a parent once took care of now become additional expenses.
Life insurance be as simple as a gift. Even single people, with no dependents or significant others, have valid reasons for purchasing a policy. It’s an effective way to take care of ailing parents, a beloved sibling, or ease the burden imposed on a business partner after your death.
It’s exactly what it sounds like. Think any potential medical bills and funeral arrangements which can cost anywhere from $8,000 to $10,000. Even a $50,000 policy can go a long way to help your loved ones cover these final costs.
Figuring Out How Much Life Insurance You Need
No one can tell you exactly how much life insurance you need since it’s entirely dependent on your reasons for purchasing it in the first place. Even top financial experts don’t agree on a set amount: They recommend choosing a term life policy with a death benefit anywhere from six to 20 times your annual income.
Consider the following factors when thinking about how to figure out how much term life coverage you need:
How Much Debt Do You Have?
Term life insurance should provide ample coverage to replace your income or pay off any debt left in the wake of your passing — like your mortgage or any loans you haven’t had the opportunity to pay off.
What Are Your Monthly Expenses?
Life insurance can help your family maintain their lifestyle even when you’re no longer around to support it yourself.
Would There Be Any Additional Expenses?
Think about the hit to your loved ones’ budget after you’ve passed away. If you’re the primary caretaker of your children, what would it take to cover all of your current responsibilities?
- Childcare: averages about $12,000 per year per child
- Housekeeping: ranges between $20 to $40 per hour
- Extracurricular activities: about $700 to $1,200 per year per child.
- And don’t forget about college tuition! Including fees, housing, books, etc., expect to budget between $25,000 to $50,000 per year!
If you have aging parents or siblings who depend on you, you might have other expenses to consider, like covering a retirement community or assisted living facility or ongoing medical expenses.
Here’s a cheat sheet to help you determine how much life insurance coverage you need. Total up the following:
- Auto loans
- Personal loans
- Student loans
- Business loans
- Monthly expenses
- Additional expenses
- Other (financial gift)
Now compare that to your annual salary times number of years you’d like to cover. Does that amount cover everything your loved ones might need? Do you want to get enough coverage to cover all of the above in addition to your annual salary? These are questions that only you can answer.
Buying Affordable Coverage
By budgeting for life insurance, you can avoid the utter shock of facing near-insurmountable costs after the passing of a partner and contributor to your family. Life insurance can help your family maintain its lifestyle even when you’re no longer around to support it yourself.
Fortunately, term life insurance is simple and affordable, making it a great option for those who want to protect their loved ones without breaking the bank. And buying term life insurance when you’re younger means you can purchase a larger policy for less than if you waited. It’s smart planning, plain and simple.
For example, let’s say you’re a healthy 25-year-old female. With Bestow, a 20-year $250,000 term life policy could cost you less than $15 per month, or $180 per year. That’s some decent coverage for a fair cost, right?
Buying life insurance when you’re younger isn’t glamorous — very few people will leave a “like” on a Facebook post where you tell your friends you signed up for a policy. But it’s a good idea all-the-same.
Some Insurance Is Better Than No Insurance
The loss of a loved one is never easy. Your immediate family will have to come to terms with losing you while trying to pick up the pieces after you’ve moved on.
Unless your savings can sustain your family’s lifestyle when you’re no longer around to continue contributing, you need life insurance. Any level of coverage will provide your family with a buffer period to mourn and figure out future plans. In a way, life insurance is one final reminder to your family of how much their well-being means to you.