How Much Life Insurance Do You Need?
Most people don’t want to think about their mortality, but it’s a fact of life that we won’t be here forever.
If there are people in your life depending on you financially, you owe it to them to protect and provide for them whether you’re here on this earth or not. Unless you’re ridiculously, independently wealthy, you probably need life insurance.
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Table of Contents
How Much Life Insurance Do You Need?
What Needs To Be Considered: Funeral Expenses
What Needs To Be Considered: Debt Considerations
How Much Life Insurance Do You Need?
The answer will be different for everyone. You must consider your own financial situation, family, and goals.
A quick rule of thumb is that most people with dependents need anywhere from 8 to 10 times their annual salary in life insurance.
To get more specific, I like to use the easy-to-remember acronym FDIC—no, not the Federal Deposit Insurance Corporation that covers banks (remember, life insurance and investments are not FDIC-insured).
What I’m talking about is Funeral, Debts, Income, and College.
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What Needs To Be Considered
Consider these key areas when planning for your family’s financial security, covering everything from final expenses to potential income gaps.
Funeral Expenses
Consider final expenses more broadly—not just funeral costs. Funerals aren’t cheap. You may also face medical expenses.
Maybe you want to provide a little extra money for your spouse to take time off from work. Perhaps you have a lot of family who live out of town, and you’d like to be able to assist them with their travel expenses.
I typically say go with $25,000 or so here unless you need more.
Debt Considerations
Self-explanatory here. What debts would you like or need to have paid off if you weren’t here? Leaving a surviving spouse debt-free is a great start to their financial stability.
Consider adding up all outstanding debts—including mortgages, car loans, credit cards, and even student loans—can’t get out of those, even by dying!
Income Gap
This is the hardest question to answer, as it involves more complicated math. If you’re married with young kids, your spouse and kids may qualify for social security benefits while the kids are still young.
Does your spouse work? Do you still want them to work so hard? If you’ve provided enough to pay off the debts, you no longer have to worry about those loan payments. However, there may still be an income gap for the surviving spouse.
On the other hand, if you’re married and both work and have no kids (or the kids are grown and financially independent), perhaps the surviving spouse would be fine if they’re left debt-free.
If an income gap exists, you need to calculate the lump sum required to create that income stream over the period you need it to last. This can be complex, so consider using a financial calculator with proper assumptions—or work with a financial advisor.
College Costs
This only applies if you have dependents and plan to help with education costs.
No judgments here—some people paid their way through college and want their kids to do the same, while others want to support their children. Some plan to cover tuition only and others aim to cover all college expenses.
Remember, there’s a big cost difference between a two-year community college and a four-year private school.
As a shortcut, consider using the current cost of the college you wish to fund ($15k per year for public; $30-40k per year for private) and hope that investing the death benefit proceeds will keep up with rising education costs.
Final Analysis
Finally, add up your totals for funeral, debts, income, and college to estimate the amount of life insurance you may need.
There are many types of life insurance—you may have some through work or choose to purchase your own. While the type of insurance often depends on affordability, the most important factor is having the right amount of coverage to protect your loved ones.
There’s an old adage in the industry—you can’t buy life insurance when you’re dead!
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