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How Much Life Insurance Do I Need? Tips on Estimating Coverage

Written by Jeff Rose on July 22, 2013 in Retirement  |   16 comments

Life insurance can help cover your final expenses, easing your family’s burden during a difficult time. Before you purchase coverage, there are four factors you may want to consider that can help you decide how much life insurance is right for you.

Life insuranceYou may have heard a lot about the importance of buying life insurance, but you may not be sure if it applies to you.

Well I have a newsflash for you: It does.

Before buying life insurance, it’s important to consider how much coverage you and your family will need. One of the biggest excuses I hear that life insurance is too expensive. That couldn’t be further from the truth. Buying an affordable policy is easier now than ever. These tips will help you estimate an amount that works well for you.

Consider end-of-life expenses

Funerals aren’t cheap, even when you take the least expensive option. Do you know what is cheap, comparatively? Life insurance.

When my father passed away, the funeral expenses totaled just over $10,000. Thankfully, he had taken out a life insurance policy big enough to cover those expenses. Plan for your family to spend at least $15,000 on your funeral.

Remember your debts

When a person dies, he or she often leaves behind a lot of unpaid bills. That could include a mortgage, a car loan, or other debts that need to be paid.

The mortgage should take top priority. Without enough money to pay off the mortgage, your family could lose their home.

Make sure you purchase enough coverage to pay down the mortgage. That amount will differ significantly from person to person. If you have owned a house for 20 years, then you might not have a mortgage at all, or you might have only a small amount left to repay on the loan. But if you’ve recently purchased a home, you might need $200,000 or more to cover that expense.

Paying for college and other expenses

If you have kids, you may want life insurance that will help them afford major expenses, such as buying a car or going to college.

It’s difficult to determine how much money your children will need to pay for school. The younger they are, the harder it is to make an accurate estimate.

For example, if you have a 16-year-old who has already shown interest in attending a public university with in-state tuition, then you can estimate how much that will cost (although the cost will vary depending on both state and school).

However, if you have a newborn, then you have no idea what he or she will want to do. Your child may excel in school and get into an Ivy League college that costs $50,000 a semester.

The best thing you can do is look at the current tuition of a college you think your child will attend. Considering that tuition rates have risen by about 5 percent a year in recent history, go ahead and use that number to decide how much money your kids may need.

Replacing your income

Because you have accounted for your mortgage, future major expenses, and burial, you don’t need to replace your full income. It does make sense to replace a portion of it, though. Once you’re gone, you can’t pick up extra shifts to help your family make ends meet during rough months. It’s better to be prepared so that your family doesn’t have to suffer.

Many life insurance experts say that you should divide your annual income in half and then divide that number by .05 . This means if you make $50,000, you should have $500,000 of coverage to replace your income.

If you earn considerably more than your spouse, then you might need to replace more of your income. You might also need more income replacement if you have a family member with persistent medical issues that cost a lot to treat.

By adding these four items together, you can get a rough idea of how much life insurance coverage you will need.

Jeff Rose is a Certified Financial Planner and Iraqi combat veteran. He blogs at Good Financial CentsSoldier of Finance and Life Insurance By Jeff.

16 comments

  1. Gilda B. says:

    The only problem I have is to find a life insurance company that will insure me with a health problem.I would appreciate some information on this issue.
    Thanks

  2. Cherry King says:

    I am single, and owe about $48k on my mortgage and about $17k in credit debt..would I still need life insurance?

    • Anonymous says:

      No unless you are planning to use the money in heaven

      • Arne Schonberger says:

        I am not an insurance salesperson and I think they push too much coverage to earn more commissions, however, if you are young and may acquire dependents in the future, ie Mary a person with kids or have kids of your own, you will need more ins.

        The problem is that you may became uninsurable if you get cancer, even if cured, or high blood pressure or other condition. Therefore, estimate an amount you could need and buy that amount. Alternatively, some policies have riders that allow you to buy more insurance in the future with no health questions, buy that to cover the unexpected.

  3. Gene Cooper says:

    Home, Cars(2),credit cards(2), utilities,entertainment rap-around (Tv,Telephone,Computers, cellphones(2),Comes to a total debt of $311,000.00;I’m a disabled combat veteran 100% unemployable (Vietnam), SBP was paid into for 33 years per month. Do I need anymore insurance? I did finish my twenty years, 15 years 8 months active then 5 years 7 months under hospital and VA care. Have tri-care for life for my wife and I. Should I get anything else, just in case I depart first.

  4. Carolynn MacDonald says:

    SBP is probably only 55% of your current or at death monthly pay, right? That means your family loses the other 45% after the 10k it costs to bury you – yes, even if you are buried in the national cemetery, there are no military funeral homes. If you die as a result of your service connected illness/injuries your spouse can file for DIC through the VA since you are 100% but I think it might be only if you are 100% total and permanent — so you really should pursue permanent and total 100% rather than just employability so that your spouse can be covered under CHAMPVA. All of the above is just living expenses not including paying for the house — you need to get at least a $250k policy

  5. Ty says:

    I’m turning 40 next year, I don’t have any life insurance and i’m currently looking for some. I don’t have any medical history i’m in good health a little overweight at 6’2 about 250 and i’m keeping a close watch on my blood pressure which is 130 over 70.I’m trying to learn more about health and life insurance before I need it. I’m a over the road truck driver earning about 95,000 a year mortgage I still owe 105,000 on 210,000. Credit card debt I owe 8,000 on 40,000 credit line no kids or wife, just trying to figure out better ways to manage my life…

  6. Kobe Carrera says:

    If you are 78 years old, what is the maximum life insurance I can leave to my kids and what would the cost be. Minimum $50,000 – $300,000

    • JF says:

      Kobe, at 78 years old you will not be able to qualify for any kind of life insurance. At this time in your life, your responsibilities should be a lot less. E.g. Your kids are grown and not dependent on your income, your mortgage should be paid off, and you should have little or no debt. Hopefully you had invested well into an Independent retirement account. Or you have some assets. During this time in your life, you should be self-insured.

  7. Jghasbro says:

    Now that I’m retired with a healthy retirement fund, I’m considering dropping my term plans ($1,000,000) and just keeping my whole life plans ($100,000). Any caveats?

    • JF says:

      Jghasbro,

      If you have people still dependent on your income, I would still hang on to your term policy. Also you need to consider your current responsibilities. If you still have a mortgage, consumer debt, etc. If you have a healthy retirement fund, depending on the amount. You would be considered self-insured. Hence, not needing any kind of life insurance.

  8. JD says:

    I retired 2012 and my question -Is it worth paying off my mortgage from my IRA account? As of now I’m surviving on annuity and SSS and vehicle balance of around 15K.

  9. EFX Moderator_KB says:

    JD, that’s a great question. Encountering debt as you enter retirement may shrink your options. People facing this obstacle often ask whether they should use their retirement savings to pay off debt. The short answer is no, unless it’s unavoidable. Should You Use Your Retirement Savings to Pay Off Debt? I hope this helps and thanks for posting.


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