When buying life insurance, a question you may ask yourself is, “How much life insurance do I really need?” We’re sharing key factors to consider when determining the right amount of life insurance for your personal situation.
If you haven’t already, get connected with an insurance or financial professional who can review your personal situation to help determine how much life insurance you need.
1. Your life stage could impact how much life insurance you need:
Your life stage is the largest contributing factor and the first thing you should consider when deciding how much life insurance you should have. Talk with your financial professional about how your age, family status, income level and liabilities impact your need level.
Age is a determining factor for how much life insurance you could have. Typically, the younger you are, the lower your life insurance premium could be.
Family Status can also impact how much life insurance you need. Are you single or married? Do you have children at home? Are your kids planning to go to college? If you have a spouse and children at home, you may need more life insurance than a single person with no children.
Income can greatly influence how much and what type of life insurance you need and can afford. Are you young and building your career? Are you middle-aged and established in your career? Are you retired or approaching retirement? If you have a high income, you may need more life insurance than someone with low income to replace your lost income after an unexpected event.
Liabilities can also impact how much life insurance you should have. What liabilities do you have that your family would need to handle after an unexpected event? Do you have a mortgage? Car loans? Other bills or debts? How much life insurance you need is higher when you have these kinds of liabilities. Without life insurance, your loved ones may be unable to replace your income to help pay off your liabilities.
While the amount of life insurance you need may decrease as you approach different life stages, you should always consider owning life insurance as the need never fully disappears.
2. What you plan to use life insurance for can impact how much you need:
When deciding how much life insurance you need, talk with your financial professional about why you need life insurance. What would you like your life insurance policy to do for you? A big reason to buy life insurance is to take care of the financial impact of an unexpected death.Life insurance can also be one of the many ways to help you plan for retirement.
Do you want death benefits?
Life insurance can provide a death benefit that would replace your lost income for a certain period of time helping your family pay for your funeral expenses, pay off your mortgage and other debts, and could even help pay for your children’s education. Do you want to provide your family with five years of replaced income, maybe ten? If something happens to you, your family may not be able to replace your income or pay for your final expenses. Life insurance can allow your family to maintain the same lifestyle via a death benefit.
Do you want living benefits?
Life insurance can also provide living benefits that can supplement your retirement by growing your cash value. Or, some life insurance products offer an accelerated death benefit, meaning you can access part of your death benefit while you are still living if certain conditions are met like experiencing a critical, chronic or terminal illness. The accelerated death benefit can help you afford medical care and get the support you need when you need it most.
Do you want both? Connect with a financial professional to help you determine whether owning one or multiple life insurance products is right for you.
3. The cost of life insurance can impact how much you can afford:
The cost of life insurance can vary based on the product type, your age and other contributing factors. How much life insurance you ultimately end up buying could depend on how much life insurance you can afford.
Though the need for life insurance is typically higher when you’re young, you may not be able to afford your ideal life insurance coverage right away due to your income level or debts, and that’s okay. In many cases, you can gradually adjust your life insurance coverage over time to meet your affordability and need level.
Depending on your life stage, you may want to purchase multiple life insurance products to fit your needs or you may find yourself unable to afford certain types of life insurance products.
It’s important to assess your situation with a financial professional to determine if you can comfortably afford the premium, both now and if you were to experience a lifestyle change.
Now that you’ve thought about how much life insurance you need, find out what type of life insurance will work best for you in “3 steps to decide what life insurance you need.” Guess what? You’ve already completed step 1.
FAQs
Talk with your financial professional about how your age, family status, income level and liabilities impact your need level. Age is a determining factor for how much life insurance you could have. Typically, the younger you are, the lower your life insurance premium could be.
What determines how much life insurance you need? ›
To determine how much coverage you need at any age, consider how much money your life insurance beneficiary would need to cover expenses in your absence. This can include expenses covered by your income, existing debts or a mortgage payment, tuition and end-of-life expenses.
What are three methods used to determine the amount of life insurance needed? ›
Sum all of your short-term needs, which likely fall into three categories: final expenses (funeral, attorney, probate), outstanding debts (credit card, auto loan, college loans), and emergency expenses (medical, auto/home repairs).
When determining your need for life insurance, you should consider your? ›
You can talk to a financial professional who will consider your age, income, family situation, financial obligations, and other factors to calculate a detailed estimate of that amount.
How do you determine the right amount of life insurance? ›
The life insurance coverage amount should be enough to support your family financially after you, while its premium fits well into your regular expenses. It is recommended to have life cover of at least ten times the annual income.
What are 3 factors that insurance companies look at to determine how much your insurance is going to cost? ›
Understanding what determines your auto insurance premiums can uncover new ways to save. Auto insurance rates depend on factors such as your age, gender, location, the kind of car you drive, your driving record and possibly even your credit score. Here are 12 things that can influence the cost of your car insurance.
What are the three 3 main types of insurance? ›
Although there are many insurance policy types, some of the most common are life, health, homeowners, and auto. The right type of insurance for you will depend on your goals and financial situation. Consumer Financial Protection Bureau.
Which of these factors help determine an insurance life insurance? ›
The factors that help determine an insured's life insurance policy include the insured's salary, marital status, place of residence, and avocation (hobby). Insured's salary: The higher the insured's salary, the higher the potential coverage amount they may be eligible for.
What are the 3 P's of life insurance? ›
A television commercial selling life insurance speaks about three Ps that all focus on one aspect of their policies… price, price and price. It is an easily understood and remembered sales tool, although the substance, value and need for the product is not included in the tag line.
What are two key factors that determine the amount of life insurance to buy? ›
3 factors to help determine how much life insurance you need
- Your life stage could impact how much life insurance you need: ...
- What you plan to use life insurance for can impact how much you need: ...
- The cost of life insurance can impact how much you can afford:
In addition to your death benefit, cash value is the investment vehicle within permanent life insurance policies—including whole, universal and variable universal. Your life insurance's cash value is based on how much you've paid in premiums, how long your policy's been active, and the size of your death benefit.
What are the methods of determining the amount of life insurance needed by a household? ›
Just add up your debts (not including your mortgage), multiply your yearly income by how long your family would need support, include your mortgage payoff, and estimate your children's education costs. This total gives you your estimated insurance coverage.
How to determine how much insurance someone needs? ›
Perhaps the most well-known calculation model is multiplying your annual income by 10. For example, if you make $100,000 per year, you'll need $1 million in life insurance. In another version of this rule, you'll add an extra $100,000 per child to cover the costs of their education.
What is the method of determining life insurance requirements? ›
The classic 10x rule1
The 10x rule simply means you take your annual salary and multiply it by 10 to determine how much life insurance you need. So, if you make $50,000, you would use $500,000 as your base life insurance amount.
What determines how much you pay for life insurance? ›
The premium rate for a life insurance policy is based on two underlying concepts: mortality and interest. A third variable is the expense factor which is the amount the company adds to the cost of the policy to cover operating costs of selling insurance, investing the premiums, and paying claims.
What is the 10x rule for life insurance? ›
The 10x rule simply means you take your annual salary and multiply it by 10 to determine how much life insurance you need. So, if you make $50,000, you would use $500,000 as your base life insurance amount.
What should my total life policy amount be? ›
Most insurance companies say a reasonable amount for life insurance is at least 10 times the amount of annual salary. If you multiply an annual salary of $50,000 by 10, for instance, you'd opt for $500,000 in coverage. Some recommend adding an additional $100,000 in coverage per child above the 10x amount.
