Calculating Your Life Insurance Needs
Figuring out how much life insurance you will need down to the exact penny is probably not going to happen.
However, you can use this life insurance cost estimator to get a strong idea about the amount of coverage and the term length you may need.
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- 1. Start
- 2. Expenses
- 3. College
- 4. Income
- 5. Savings
- 6. Spouse
- 7. Result
How Much Life Insurance Do I Need
Deciding to purchase life insurance to protect your family is the best decision that you can make, but it can get complicated when it comes to answering the question, how much life insurance do I need?
There are several ways to figure out the range of life insurance quotes you should be considering based on your specific life situation that can make choosing coverage easy.
Today, I will discuss how to determine the amount of life insurance you need to protect your family, the average amounts of coverage people choose and how to find the best life insurance companies and quotes once you determine how much life insurance you need.
Figuring Out Your Rate (Example)
I think the best way to help you figure out how much life insurance you need is to give you an example throughout this post of how it would look trying to figure out how much life coverage you need.
Now, if you don't know how term life insurance works then read our guide on that first.
For this example we will go with Reshawn & Dustin, Reshwan makes $75,000 per year, and Dustin is a stay at home husband.
Reshawn finished school without any student loans; however, they were still paying down Dustin’s $50,000 in student loans.
They have a 30 year 350,000 mortgage on their home, three kids ages 2, 4 and 6 who they are planning to send to college, 2 cars, and around $60,000 in total credit card debt.
Right now, Reshawn & Dustin are responsible for over $460,000 in expenses, and that’s not including the cost of college for their kids which will probably come out to around $100,000 for each of them.
This means that if Reshawn were to pass away, it would leave over $760,000 in expenses that would still need to be taken into consideration.
How To Calculate Life Insurance Needs
Following the above example, go ahead and figure out what your total income is and what your current and future expenses could be.
Now that we have the full picture lets look at each individual part of the equation to figure out how much coverage you should purchase.
Your Annual Income
Most advisors recommend purchasing 10 times your income; however, I always recommend buying at least 20 times your annual salary if you can afford it.
If we go with the lower amount and Reshawn started with 10 times her annual income, her starting coverage amount would be $750,000.
On the surface, this amount seems like more than enough coverage to cover her family if she was to pass away, but in all honesty, it isn’t going to be enough to cover everything.
At best, the coverage gives their family 10 years to survive before they run out of money and if they paid off their home at $350,000 it would only leave $400,000 of cash left which would just be about 5 more years of living expenses.
Total Amount Of Coverage Needed So Far: $750,000
Your Current Expenses
Adding up your current expenses is going to be the next step, and I recommend adding everything you can think of to your expense list such as:
If we take into account the above expenses for Reshawn and Dustin, their total expenses are somewhere around $785,000 if you include food and other annual expenses.
If we look at our total expenses of 785,000, it would mean that a $750,000 policy would only be enough to pay down most of the expenses but leave nothing to continue the family in a forward moving direction financially.
At this point, you want to add half of your expenses to the amount of coverage you should purchase. $785,000 / 2 = $392,500 and I would just round that up to $400,000 in coverage.
Total Amount Of Coverage Needed So Far: $1,150,000
Your Future Expenses
This is going to be the toughest area to account for since our plans won’t always work out the way we expect them to work.
The most significant and most important future expense I can think of is money to cover your kid's college or to cover their daycare expenses.
This is also a good time to think about generational wealth and what you want your legacy to be.
According to Travis Hornsby of Student Loan Planner, Americans owe at least $2 Trillion in student loans.
This means that student loans will continue to be a significant debt and expense for future generations to come and I think it is a smart Idea to add an additional $100,000 in coverage for each child that you have.
Total Amount Of Coverage Needed So Far: $1,450,000
Based on the Above assessment, Reshawn will be looking at about $1,500,000 in coverage and Dustin should be looking at around $750,000 in life insurance for himself which is half of Reshawn’s coverage amount.
Also, since he is a stay at home spouse, Dustin will find that insurance companies will only issue life insurance coverage based on a percentage of the amount of coverage Reshawn already has.
It’s easy to think that only the breadwinner in the home will need life insurance; however, when a death happens in a family it can affect your income and your mental health.
It is an excellent idea for everyone to have an adequate amount of coverage.
Reshawn's Life Insurance Needs = $1,500,000
Dustin's Life Insurance Needs = $750,000
Now that we know how to figure out the amount of life insurance you need it's always best to check out a few term life insurance rates by age.
Now, let’s discuss how long your life insurance should last.
How Long Your Term Life Insurance Should Last
When it comes to a term life insurance policy you are given a few options for coverage term lengths, and each choice can work for specific situations:
2 Year Term
This option is a new entrant into the world of life insurance.
A two year term option is excellent for anyone that needs life insurance but isn’t ready to commit to long term coverage.
This option is affordable; however, it isn’t always the most affordable so be sure to compare it to other term length options before deciding on this option.
5 Year Term
The five year term option would be best for someone who has a limited budget but still wants to have life insurance.
It is also an excellent option for parents who take out loans for your kid's student loans, it will cover them during the duration of their 4 years at a school.
A 5 year term is usually one of the most affordable life insurance options.
10 Year Term
The 10 year term option is excellent for people who will be in a better financial situation within that time period and have a substantial amount of income to the point where life insurance may no longer be needed.
I have found that most of my customers in their early 20’s choose this option because of its great price and honestly most of them aren’t thinking past the next 30 minute’s let alone the next 10 years.
15 Year Term
At the 15 year term option we are in the middle range of pricing as well as the middle of the road as far as life situations.
Your kids will probably be 15 years older if you have any and your debts have been decreased by 15 years if you have been paying them.
This option is great for someone with a growing family.
20 Year Term
The 20 year term option from my experience is going to be the best of both worlds when it comes to both monthly premium and length of coverage.
If you have children most of them will be either going into being 18 years old or young adulthood.
Your car loans will definitely be paid off by then, and you would only have 10 years left to pay off your mortgage if you have one.
There is a pretty substantial jump in monthly premium going from a 20 year term to a 30 year term, so this policy is always the best choice if you don’t know which one to choose.
30 Year Term
The 30 year term option is the most expensive option when it comes to life insurance.
It is going to give you the most extended length of coverage, and over time it will also give you the most savings because your rate will be locked in for 30 years.
In 30 years your mortgage should be paid off, your kids should be well into their careers and out of the home, and your overall expenses should be much lower.
Your need for a significant amount of life insurance probably won’t be the same.
Recommended Term Length For Reshawn & Dustin = 30 Years
Now that you know how to calculate how much life insurance you need and what the best term length option will be for your specific situation, it's time to get some life insurance quotes.
There is no reason to wait on getting coverage, and now that you know the formula you can click here or on any of the above buttons to look at quotes and buy the correct coverage amount.
Frequently Asked Questions
What is the rule of thumb for life insurance?
You will probably hear the rule of thumb for life insurance is 10 times your annual income; however, I have found that going for 15 to 20 times your income will give your family much more protection and a much larger financial cushion.
How much life insurance is enough?
Figuring out how much life insurance is enough is all about determining your financial needs and your current familial situation. If you have a mortgage for $250,000 then of course you will probably need at least $500,000 in coverage to cover the mortgage and still leave your family in a strong financial position.
How are life insurance costs calculated?
The cost of life insurance is calculated on a rates per thousand basis, based on age ranges and coverage amounts. For example, if you are 23 years old and your rate per thousand for up to $100,000 is .32 cents and you wanted $75,000 in coverage. You would multiply the number of thousands which would be 75 by .32 cents and that would give you a monthly premium of $24.00 per month.
Is life insurance based on income?
Life insurance is partly based on income, most life insurance companies allow you to only purchase up to 30 times your annual earned income. They do this to make sure you can afford the policy and that you aren't purchasing substantially more coverage than you are worth.