How Much Life Insurance Do You Need?
You know you need life insurance to ensure your dependents will be cared for if you die. But exactly how much you need depends on a variety of factors. If you’re retired with no dependents, for instance, your insurance requirements will be quite different than if you are still supporting a spouse, children and aging parents. The following steps are intended to help you reach a basic estimate of your life insurance need. For the most accurate number, you will need to use an insurance calculator tool—as indicated in Step 5—or consult an insurance professional.
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Things You'll Need
- Calculator
- Mortgage statements
- Estimate of your annual income (and your spouse’s income, if married)
- Debt statements
- Current savings, investment and retirement statements
Instructions
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1
Determine the immediate cost of your death. Funeral costs—which vary depending on the type of burial or service—are the most obvious factor, but you should also add uncovered medical expenses, estate taxes, mortgages and any outstanding debts to reach a total. Even if you have no dependents, you may wish to purchase a small policy to cover the cost of your death.
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2
Do you have a spouse and children who rely on your income? If so, you will need to estimate your replacement income—the amount your dependents will need to maintain their lifestyle in the event that you die. Take your annual yearly income and multiply by years left until retirement (for the sake of simplicity, inflation—usually estimated at 3 percent—has been left out of the equation). For instance, if your salary is currently $40,000 and you expect to work 25 more years, your family would require $1,000,000 in replacement income. Add this number to the cost of death calculated in Step 1.
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3
Add any future expenses to the replacement income you calculated in Step 2. This might include variables such as the anticipated cost of college tuition for each child or the estimated value of daily activities you perform, like child care or home maintenance.
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4
Subtract assets, including current savings, investments and retirement plans, and other sources of income, such as your spouse’s projected income (calculated as in Step 2). Your final total is an estimate of your insurance need.
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5
For the most accurate estimate, plug the above information into an online insurance calculator tool. Calculators can be found on a variety of financial and insurance company websites, including Kiplinger (see Resources). A calculator will be able to factor in important variables like inflation, the tax bracket for both you and your spouse and any needs unique to your family.
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