How Much Life Insurance Do I Need?

How do you calculate how much life insurance you actually need? Just having a policy is not enough. If you don’t calculate it well, you might miss out on the point of having the policy, which is to provide for your family, loved ones, or dependents if anything happens to you.

How Much Life Insurance Do I Need?

Let’s go through the factors you need to consider when looking at what they call the “face value,” or total death benefit payout, of a life insurance policy.

End-of-life expenses. Many put this calculation last on the list, but let’s start with this, the first and most basic expense your loved ones will face. Factor it in as your starting point, since it is likely to be the lowest expense they have to deal with, and add on from there.

Outstanding obligations. The next concern your loved ones will face is the transferring of any outstanding debt to their account. Any loans you have taken out, any mortgages currently being paid for, and any credit card bills will be something they have to pay off.

You can calculate their total amounts to be safe, or you can project what they will be when it’s closer to your middle age (50 or 55 years old) and you’ve already paid most of it off. For your credit card bills, you can calculate the average amount per month for the last year, add on a bit for inflation, and include that.

Income per year. After calculating end-of-life expenses and outstanding obligations, you can now think of stabilizing your family’s lifestyle. The minimum amount you can add to the mix is a year’s worth of your total annual income, but you can also multiply it as much as you think you should. The idea is for them to have something to live on as they learn how to manage without your income.

Years of college. If you have children, in college or getting there, you might want to add this as well. Calculate how much they would need to cover the basic tuition and textbooks for the number of years they would be in college, and make it part of the face value. And make sure your partner or financial coordinator knows where all these should go!

Won’t I Face a High Premium?

Calculating the ideal face value of your policy is one thing–calculating the premium is another thing altogether. To simplify it, consider all the factors we outlined, and figure out what to prioritize. You can decide that covering at least end-of-death expenses and outstanding obligations is what you can afford for now. You can also prioritize living expenses and college tuition instead.

Are There Other Ways to Calculate My Life Insurance?

Yes, there are general ways to calculate your life insurance, if you are willing to lump-sum the death benefit and let your loved ones manage it according to their expenses at the time. Some agents will suggest that you get the face value at 6 to 10 times your current annual salary, adjusting a little for inflation.

Others will suggest you calculate your number of years until retirement, and then multiply your desired minimum value by that number of years. Others will say to multiply all your annual expenses by 20 or maybe also the number of years until your retirement.

If you are satisfied with the face value, and confident in your family’s management of their finances, then this would work for you. The important thing is that you are able to support and secure them no matter what happens.

James Donaldson

I like to blog about insurance, health and the great outdoors. Memphis born and raised.