Answering the question, “How much life insurance do I need?” is part art, part science. Most experts recommend about five to 10 times your annual salary, which, as a general rule of thumb, is a good place to start.
But, does multiplying your salary by at least five times seem like enough?
While any life insurance is better than nothing, financially protecting your loved ones is usually not as simple as just replacing your annual income when you have children, childcare expenses, a mortgage and any other myriad of expenses that come up in day-to-day life. And, shocker, there isn’t a single answer for everyone.
To determine the best coverage for your financial situation, you’ll need to dig a little deeper to ensure you purchase the right amount. The good news: uncovering the answer is easier than you might think.
What should life insurance cover?
To determine how much life insurance you should have, you must first understand what people typically buy life insurance to cover and compare it to your financial situation.
People like you buy life insurance to help financially protect their loved ones even when they’re no longer around. Death is hard enough, and, as you can image, a financial strain can make it even worse. People buy life insurance to help with the following expenses:
- Replace lost income that covers day-to-day living expenses for a spouse and dependents (minus social security survivor benefits)
- Pay off a mortgage or any other significant debt
- Cover consumer debt (credit cards, car loans, etc.)
- Pay for childcare
- Cover future college expenses
- Pay off unpaid medical bills or taxes
- Cover burial, estate taxes, and any other final expenses
- Create an inheritance or provide supplemental retirement income through a tax-free death benefit
The list could go on, but that should give you a pretty good idea of what kind of expenses you’re hoping to cover.
Questions to ask yourself when shopping for life insurance
While the right answer for how much life insurance you need varies from person to person, you can use an online life insurance calculator to factor in the above information to help you come to a confident conclusion – no air math necessary.
But if you’d like to understand further what you should factor into your decision, these are some questions to should ask yourself:
How will your spouse keep up with the mortgage or other housing expenses?
Whether you own a home or not, you need to consider how your spouse or partner might keep up with house payments in the event of your death. If you have a large home with a mortgage, this is especially important. Not only do you need to leave behind enough money to pay off the mortgage, but you need to plan for upkeep and maintenance as well. Even once your home is paid off, your spouse or partner will need to pay for any maintenance and repairs that may arise.
Same idea applies to renting. While renting obviously doesn’t fall into mortgage debt, many couples max out their allotted budget for rent. Would your partner be able to take on that responsibility without you? Of course, they could downsize, but it takes time and money to find a new place and move in.
Does your family have any debt?
Compiling information from the U.S. Census bureau, Value Penguin was able to determine that the average American family with debt owes $16,000 on credit cards alone, yet few people account for this debt when they buy life insurance coverage (but a calculator does.) If you don’t want to leave your family with a stack of bills upon your death, make sure to buy enough coverage so your family could pay off credit card debt, car payments, and personal loans.
How much will childcare cost?
Childcare is another expense you’ll want to plan for when you buy a no exam term life insurance policy because the cost can be challenging to cover unexpectedly. The average cost of full-time daycare in the United States is about $900 a month. And that price considerably increases if it’s childcare for an infant. If you have family nearby, maybe that’s not as much of a concern. But, if you and your spouse are the sole sources of childcare and its associated costs, it’s important to ensure it’s covered.
Do you plan to pay for college?
People have conflicting viewpoints on whether or not they want to pay for college fully. Whatever your viewpoint is, you should be prepared to put it into action when you buy a life insurance policy. If you choose to use a life insurance calculator to understand how much coverage you need, it will factor in a question on what your intentions are for covering college: none, two years, four years in state or four years out of state.
What does your family need to cover daily living expenses?
On top of college and housing, it’s crucial to buy enough life insurance coverage to pay for daily living expenses – especially if you want to help your family maintain the same quality of life. While this line item could theoretically be covered under income replacement, it’s important to remember how high the costs are for things such as: school expenses, extracurricular expenses, groceries, clothing, utility bills, and gasoline.
Do you want to leave a legacy?
Life insurance isn’t only for the nuclear family. Beyond bills and mortgages, some people choose to purchase life insurance and name beneficiaries who they plan to leave a legacy. A legacy, of course, can be your spouse and children, but it could also be to fulfill your lifelong dream to be the coolest aunt or uncle and take your niece on cultural trips around the world. A life insurance policy can be used and is often used, to uphold those plans.
Ensuring you’re not underinsured
The expenses of everyday life are usually where the five to 10 times your income rule comes up short. Many Americans live paycheck to paycheck and are in over their head with housing expenses. Little savings coupled with significant debt can be a disastrous combo financially.
With these factors to consider, it’s easy to imagine how following a generic formula could leave your family in the lurch.
A common misconception with life insurance is that most people think the policy that comes with their employer benefits is ample coverage for the unexpected. Often, if you have a spouse and children to help support, it’s far from enough.
A Bankrate survey showed that nearly half of insured individuals (47%) had coverage amounts of $100,000 or less. That includes 21% who had a benefit amount of $25,000 or less.
As Bankrate notes, part of the problem is that many individuals rely solely on employer-provided life insurance assuming that it’s enough. While an employer-provided policy is a convenient, uncomplicated way to get some coverage, there are quite a few hang-ups.
- It typically only provides coverage that’s one to two times your annual income
- Coverage usually expires once you leave your job
- Purchasing additional life insurance through work usually has you paying more for the same amount of coverage due to group rates
Unfortunately, having life insurance coverage and having enough life insurance coverage are not one and the same.
“The $25,000 to $100,000 policies that you usually see in employer group plans may cover your funeral expenses, but they’re not going to pay off a mortgage or put a kid through college,” Brendan Bridgeland, the director at the Center for Insurance Research of Cambridge, Massachusetts, told Bankrate.
It’s important when deciding on how large or small of a policy that you’re going to purchase that, yes, the death benefit is 5 to 10 times your annual income, but that it also factors in caring for children, covering debts and final expenses and that it’s enough so that your family will be comfortable if you’re no longer around.
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Determining how much life insurance you need
When it’s time to pick a policy amount and term duration, an online life insurance calculator can be your best friend. It takes the confusion out of needing to make an educated decision on all the factors above.
By using our free calculator, you can input information about:
- Your age and your spouse’s age and income
- Any children you have, anticipated childcare expenses and intentions to pay for college
- Any debts that need to be paid over time
- Advanced settings are available to input other helpful information about your savings and overall financial situation
Taking into consideration all the information you put into the calculator, you’ll be presented with 3 tiers of recommended coverage and term lengths. The term length recommendation – typically 10, 15, 20 or 30 years – should be sufficient enough to cover your loved ones until debts are paid off and the kids have grown into financially responsible adults.
The reason we provide tiers is that there isn’t one right answer for everyone. You know your financial situation best: your savings, your daily living costs and your plans for the future. With a range of options, you can determine where you’re most comfortable and how much that policy premiums will likely cost.
Thinking about death is difficult. And trying to figure out just how much your family would need if you were suddenly no longer around isn’t much easier. Thankfully, this isn’t a process you need to go through on your own. With the proper information and the right tools, financially protecting your family can be something you accomplish with minimal hassle and maximum confidence.
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Haven Term is a Term Life Insurance Policy (ICC15DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Not all riders are available in all states. Our Agency license number in California is 0K71922 and in Arkansas, 100139527.