How to calculate how much life insurance you need

How to calculate how much life insurance you need

You and your family have a lot of plans. Whether it’s a trip to Disneyland next summer or your kid’s college savings, you have a lot of financial goals to work towards to. While financial experts agree that life insurance is the best way to protect your family in the event that you die prematurely, it’s about more than financial protection. Life insurance completes your financial goals for you and fills in the gaps when you’re gone.

That being said, there is such a thing as being too protected – that is, buying too much life insurance. Think of it like a three little pigs scenario – you want to make sure you have just the right amount of life insurance. Why? The more life insurance coverage you buy, the more it will cost you every month. We’re not in the business of tricking you into paying more than you need to, so we’re going to break down exactly how to calculate how much life insurance you need.

(Check out this article for advice on how long your term life insurance should last.)

Five Financial Obligations

There are five major financial obligations (plus your current savings) that you need to think about when calculating your life insurance need:


Unless someone figures out how to make it free, a college education is going to be one of the biggest expenses in your child’s life. That’s why we typically suggest that you build four years of college tuition into your life insurance policy for each of your children. Remember that college is only going to get more expensive in twenty years, assuming current trends hold true.

We took a look at how much college will cost in 2028 and, according to the U.S. Department of Education, a single year of college may cost two or three times more than it does now. That’s true for both public college and private college – no matter which road you take, it’ll cost you.

Our own life insurance calculator takes into account how much we project college to cost in the year your child will be applying to college. This makes it easy to calculate how much coverage you should have to cover this obligation.

Childcare & other dependents

There’s a good chance that if you die prematurely, your spouse will need to pay for additional childcare. Whether that’s a nanny, a daycare, or something else, it will still cost your spouse money. By calculating against your current childcare costs or potential increase in childcare costs, you can leave enough money to pay for childcare and give your spouse the flexibility they need to responsibly care for your children.

You may also have other dependents – aging parents that rely on you to support them, for example – who may need financial protection after you’re gone. Make sure you properly account for the cost of their care, either at a third-party institution or with a sibling or other family member.


For most people, this category is all about their home mortgage. Mortgages are some of the largest – and longest – debts we take on in our lives. We typically suggest that people buy life insurance to cover their longest lasting financial obligation, and for a lot of our customers, that’s a thirty-year mortgage.

Another example of debt would be private student loan debt. Depending on the type of debt, your spouse may be responsible for paying off your student loans. Additionally, if your student loan has a co-signer, they will be responsible for paying it off after you die. Life insurance can help pay that off in one fell swoop.

When calculating your life insurance needs, start with the amount you owe on your existing debts and the period of time you have scheduled to pay them off, then move on the rest of the major financial obligations.

End of life expenses

The average funeral costs about $10,000. We like to throw this into your recommended life insurance policy because the last thing you want your family to worry about while they’re grieving is how they’re going to pay for your funeral.

Financial cushion

Coming up with an amount to put in your financial cushion is a deeply personal process. Financial cushion is another term for "income support" – i.e., replacing the income that you otherwise would’ve brought in.
Some financial advisors tell you that your financial cushion should equal your after tax income multiplied by the length of your term. For example, if you make $58,000 after taxes, and your policy lasts twenty years, your financial cushion would be $1,160,000. While this advice works for some shoppers, many balk at the high coverage amount (and the associated high premiums).

Depending on you and your spouse’s financial situation, the amount of financial cushion you want to provide may be vastly different than what advisors suggest. For example, if you have a working spouse, you may not feel the need to provide twenty years of financial support. You may also expect your spouse to get remarried at some point in the future. Others want their spouse to remain a stay-at-home parent, and provide a significant financial cushion in order to make that a reality. The possibilities are endless and specific to your personal situation and desires.

We suggest discussing this number with your spouse or other family members in order to make sure that you’re all on the same page about the amount of financial cushion your life insurance policy will need to provide.

Other savings

Many people buy life insurance in order to complete their financial plans in the event that they die prematurely. That means they want life insurance to top off their spouse’s retirement account, their kid’s college savings account, and other savings vehicles.

Given that, it might make sense to take your current savings into account when calculating your life insurance need. This includes your liquid savings, your investments, your retirement accounts, and whatever you have saved for your children’s college educations. You can reduce the amount of coverage you need (and your monthly premium) by adding up these numbers and subtracting the total from your policy amount.

Not all shoppers want to do this, however – some want their savings to be considered a separate nest egg from their life insurance coverage. Again, this is a personal decision that you should talk over with your family.

Calculate your life insurance need

While you can calculate your life insurance need on your own using a pen, paper, and a calculator, you can also use the life insurance calculator that we built on our site. Just head to our life insurance page and click the link that tells us you’re not sure how much coverage you need. We walk you through all five of the financial obligations above, plus help you find the cheapest life insurance policy that fits your needs.

If you want to talk to an expert on the phone, you can call one of our life insurance agents. They’re independent from the insurance companies and non-commissioned. Our phone lines are open from 9 a.m. to 8 p.m. (EST) Monday through Thursday, and 9 a.m. to 6 p.m. on Fridays.

Image: Lady May Pamintuan