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How Much Life Insurance Do You Need?

Here’s a simple way to calculate how much life insurance you should purchase. Take into account loans, and how to ensure your family can continue its current lifestyle.

How much life insurance do you need?For better or worse, you’ll know you’ve grown up when it’s time to buy life insurance. For me, it was immediately after having our daughter, Molly. I bought a term policy so that, in the event the unspeakable happens, Lauren wouldn’t worry about making ends meet or paying for Molly’s education after I’m gone.

Recently we welcomed our second child into the world, and I’m revisiting how much life insurance we both have and will consider buying more.

How much life insurance you need is an irksome question because 1) it’s somewhat subjective and 2) it’s a moving target.

Put simply, in the event you die, you want your spouse and children to be able to continue their lifestyles without worrying about money. You may also want to provide for future expenses like your children’s education.

If you have investments or other assets, you may only need enough life insurance to make up the difference between your assets and your family’s potential needs.

Here’s a simple calculation:

1. Annual income to replace: ________________
2. Predicted retirement age: ________________
3. Current age: ________________
4. Years until retirement (line 2 – line 3): ________________
5. Total income to replace (line 1 x line 4): ________________
6. Amount for children’s education: ________________
7. Amount to pay off mortgage or other liabilities: ________________
8. Total amount needed (sum of lines 5-7): ________________
9. Existing nonretirement assets: ________________
10. Existing life insurance in force: ________________
11. Life insurance needed: (line 8 – sum of lines 9-10): ________________

As you get older, earn more, have kids, and live a correspondingly more expensive lifestyle, how much life insurance you need will go up … to a point. As you get closer to retirement age and accumulate more wealth in savings and investments, you will need less life insurance to make up the difference.

Other considerations

The primary factor in determining how much life insurance you need to buy is how much will cover your family’s expenses. The easiest way to calculate this is to multiply your income by the number of years until retirement. Hopefully, you’re currently spending less than you earn, so the income will be ample to cover current and future needs. If, however, you can’t afford to buy that much coverage right now – you might estimate a lesser amount that your family would need to cover expenses each year.

Paying off mortgages and other liabilities

In the event of your death, you may want to ensure that your surviving family doesn’t have to worry about the mortgage or other debts. Although they could continue making payments using the annual income from the life insurance payout, you may want to leave them with enough simply to pay off the debts right away.

Many lenders sell insurance policies that will pay off the loan balance in the event of death, but it’s typically more affordable to get a higher value traditional life insurance policy.

Cosigned loans

In the event you have student loans or other obligations that were cosigned by somebody other than your life insurance policy’s beneficiary (for example, a parent), you’ll also want to ensure the life insurance policy provides enough to repay this balance so the cosigner isn’t saddled with the remaining debt after your death. Ask your insurer if they will allow you to designate multiple beneficiaries with specific amounts. If not, you’ll need to draft a will that stipulates who gets what.

How much life insurance you need is a personal decision that you should make with your spouse and financial planner, if you have one. It’s easy to go through the process of buying life insurance online and get in touch with an agent who can help you determine how much you need.

Find life insurance starting at just $10 a month
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Published or updated on December 15, 2015

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 30.

  1. Travis says:

    Would you take into consideration information about SSA Survivors benefits when doing this calculation?

  2. David E. Weliver says:

    I appreciate the feedback; I did design the formula to be conservative, and I expect everybody will talk over what’s right for their family. You may choose to get just enough insurance to cover bills and the mortgage but not income replacement. Or you might not want to include college tuition in the policy amount.

    But if you’re young, healthy, (and can afford it) the annual cost of adding to the value of a term life insurance policy isn’t that great for a lot of additional peace of mind. That’s my opinion — obviously it’s subjective.

  3. Mark says:

    That formula gives an awfully high number, I don’t think you need to assume that your spouse will never work again. If for nothing else, employment is needed for health insurance.

    When I calculated how much life insurance to get, we thought about what would actually happen if I died. My wife said she would move in with her parents for emotional support and child care, then she would start working again. This plan doesn’t work for everyone, but in our case it means we really don’t need that much life insurance.

  4. While I agree it’s best to be over-insured than under-insured, I do think your calculator is overly conservative. According to my situation, I’d need 3.1 million in life insurance. When in reality if my wife got $600,000 when I died, she could pay off 3 mortgages (primary residence and two rentals), have 0 debt, and live comfortably off of rental income as well as put our child through school. In any case, I’d urge people to look at their actual situation, factor in debts, and put some serious thought into what is actually needed if your spouse is gone.

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