How Much Life Insurance Do You Need? (And You Do Need It)

I’m in my mid-30s, married, and in generally good health and don’t have children or own a home…yet. Do I really need life insurance?
As a journalist who frequently covers personal finance, this question has been all but hurled at me by financial planners, CPAs, and other money sources I’ve interviewed over the years.
An interesting trend has emerged as the years have passed: I’ve gone from sources telling me “Eh, doesn’t sound like you need life insurance” to “Um, you should really consider life insurance.” It’s not so much that I am ancient (as TikTok would seemingly like to make me feel), it’s that I want to have more financial obligations and dependents. Sure, that’s an odd if not ice-cold way to describe the desire to own a house and raise kids, but when it comes to life insurance policies, that’s basically what I’m saying!

How much life insurance do you need?

The most off-putting part for me when it comes to getting life insurance is the first step: deciding how much life insurance I need. How can I put a price tag on my life? It’s just a very big ask of a very stressed-out person who is trying to get by in a pandemic.
But people have to talk about this stuff, right? And they have to figure it out. So, after having researched the topic of life insurance to death (pun intended), I’m happy to share what I’ve learned about life insurance coverage and how to figure out how much you need.
The first step, after identifying whether you even need life insurance coverage, is assessing your financial obligations and your existing liquid assets (liquid meaning cash, baby) to know what is enough life insurance.

Financial obligations

Let’s break down the financial obligations part, and then we’ll tackle how to calculate your liquid assets. To assess your financial obligations, write down all of the things your income goes toward, such as paying the mortgage, the kids', and outstanding debts. These are the things that, if you're gone, your family still has to find ways to pay for without your salary.
Here’s a basic financial obligation checklist to work with:
  • Cost of Mortgage remaining in full
  • Cost of car loan remaining in full
  • Credit card balance in full
  • Child care expenses
  • Children or other family’s college expenses
  • Student loan and other debt in full
  • Caregiving expenses
  • Income replacement

Income replacement

One area that I’ve found myself confused about when it comes to figuring out how much life insurance coverage I need is my income replacement. As a freelance journalist, editor, and author, I’m not exactly on a concrete career path where I get a promotion every couple of years and a bonus come Christmas. Additionally, I have an increasingly small hope that I’ll be able to retire before the age of 67, and am skeptical about what Social Security benefits will even look like by that time given that America’s Social Security trust fund is running perilously low).
See, I’m getting overwhelmed just thinking about it. So I’m opting for an easier (albeit far less precise) way to get a basic idea of my income replacement figure, I am multiplying my best annual income times 10. This is a tried and true retirement savings rule of thumb. It can also help set a bare minimum upon which you can add on all your debts and future expenses.
When calculating your income replacement, multiply your annual salary by the number of years you want to replace it. Depending on your field, include scheduled bonuses as well as any cost of living raises.

Interest payments

If you have a loan, mortgage, or any other debt, remember to factor in the interest that will accrue over the years. I find that the easiest/least confusing way to do this is by using an online interest calculator.

How do you anticipate financial obligations that haven’t happened yet?

To factor in financial obligations that haven’t happened yet but that you have a fair reason to believe will happen in your life, again, assume a big-picture perspective mindset. Look at the long-term goals and expenses.
So, let’s use the example of a child’s college education. Say you pay $5,000 a year for your child’s college tuition, and your kid has two years of college left. You’d multiply the $5,000 by two. Now, let’s say you also want to contribute $10,000 for their wedding fund in the future — even though they’re not even betrothed to anyone. Throw that $10,000 on your list of financial obligations because it’s money you intend to spend.

How do you calculate your funeral costs?

When considering your financial obligations, you will want to consider your funeral costs — unless someone else is covering them. There’s perhaps never been a math problem as morbid as this one, but it’s quite important. Many people get life insurance to cover funeral and final expenses. The average funeral costs between $7,000 and $12,000. Counting this as a financial obligation is crucial because people have legit ended up bankrupt from funeral expenses.
You can find funeral expense calculators online just by conducting a Google search.

What if you're a business owner?

If you own a business, your life insurance coverage calculations will be more complicated as you’ll need to consider if/how your business will continue in your absence. You’ll then need to plug these factors into your debts and assets accordingly.
I recommend talking to a financial advisor if this is the case because this can get pretty complex, and you’ll likely look into a Key Person Insurance policy apart from your main life insurance policy.

How do you figure out my existing assets?

After adding up your financial obligations as best you can (when in doubt always go higher, because life has an insidious way of being costlier than one could ever forecast), you’ll want to get a firm grasp on your assets. This process can feel a bit like putting a price tag on your life, but try not to think about it that way. Just focus on what money you make, possess, or are certain have coming to you shortly.

What qualifies as an asset?

Remember that assets must be liquid, meaning they are already cash or can easily be converted into cash.
Your work salary definitely counts towards your assets (and like with that school tuition example, you’ll want to calculate your salary by however many more years you expect to earn it) but so too does the money in your savings account or money that might be held in a supplemental life insurance policy through your job.
Think over this carefully and don’t rush through it. This is also a good time to get squared away with anybody who might owe you money.
Here’s a checklist to consider when adding up your assets:
  • Money in your checking accounts
  • Money in a savings account
  • Cash value of any insurance policies
  • College 529 savings
  • Any prepaid funeral expenses
Note: A 401(k) retirement account is not considered liquid until you have reached retirement age, so most likely you’ll leave this out.

You know your assets and financial obligations. Now what?

Once you have your financial obligations tallied up in one column and your existing assets summed in another, you’ll want to subtract your total existing assets by your total financial obligations.
Let’s break this equation down further:
Your annual salary (times 10, at least) + your mortgage balance + your car loan + remaining debts + interest + future expenses including kids schooling such as college and funeral costs.
From that figure, subtract your savings (including college funds) + cash value of any other life insurance.
And voila! The number you end up with is the amount of life insurance you need.

How much will it cost?

I would love to give you a ballpark idea of how much life insurance, say, a 35-year-old single Dad should carry versus a 50-year-old married mother, but it’s just far too dependent on a person’s circumstances. And looks can be deceiving. For instance, I don’t own a house or have kids so my coverage needs might look pretty minimal. But I do want children, and my husband and I are certainly hoping that we aren’t renting forever. Additionally, I provide caregiving services to my mother. This doesn’t cost anything, but if something were to happen to me, who would replace me? Most likely someone who is paid to do it. So, I have to factor those obligations in, too.
You can get a fairly decent idea of your financial needs and what your loved ones will need using online life insurance calculators. Provided by life insurance companies to determine a quote, you'll enter details about your life and health. You'll have to determine if you are interested in term life insurance or whole life insurance.
Term life, as the name implies, is for a set term. You pay your premiums for a set timeframe, say 10, 20, or 30 years. When you reach the final year of your policy, it becomes null and void. There is no cash value to gain from it; it's just over. However, it is cheaper than whole life because it only pays out if you die, rather than when.
Whole life stays with you until the when and guarantees your loved ones will be taken care of. It holds cash value and you can borrow against your policy. This type of life insurance is an investment, while term life is often used by parents to cover their kids should something happen before they graduate.
Which type of life insurance you go for depends on how much you are willing to pay. The older you are when you apply, the higher your premiums will be because not only are you closing in on death but you are more likely to have health conditions. If you go the cheap route and purchase term life and it ends when your kids graduate, to convert the coverage into a whole policy you will have to undergo a medical exam – 20 to 30 years after the cleaner bill of health you received as a new parent.

Life insurance quotes

To find out how much life insurance will cost, give Bestow Insurance a visit. This online platform helps you answer the questions you have about coverage and without a medical exam, you can have quotes for term life between 10 and 30 years to cover $50,000 to $1.5 million. As it touts: "Quotes in seconds. Insured in minutes."
Lemonade is another new online platform providing term coverage up to $1 million. It doesn't require medical exams and its policies span 10 to 20 years.
Whole life will require a medical exam but you can still find quotes from top insurance companies. For these, you'll want to take a look at our Best Whole Life Insurance. Here, we break down the coverages the companies offer and sample costs. For me, I don’t quite feel comfortable deciding on the best policy without having an in-depth discussion with a life insurance agent who can offer additional guidance.
Fortunately, upon some searching online, I’m finding out that many life insurance companies are more than happy to provide a free consultation to prospective buyers. If you have a financial advisor or CPA that you trust, I recommend reaching out to them first — I know that’s my next step.

The bottom line

Sure, it's difficult to plan for your life 30+ years down the road. It's why we often gamble on having more time and putting off life insurance. But speak to someone 30 years older than you and they'll often tell you they regret not investing in it during their 20s.

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