Coverage and Cost

How Much Life Insurance Do I Need?

How Long Should My Coverage Last?

How Much Does Life Insurance Cost?

How much life insurance do I need?

Experts suggest getting life insurance coverage that's 10-15 times your income, but it depends on your financial circumstances.

Nupur GambhirAmanda Shih author photo

Nupur Gambhir & Amanda Shih

Published October 19, 2020

KEY TAKEAWAYS

  • Your life insurance amount should cover your salary, dependents, debts, and other expenses

  • A life insurance policy costs less than most people think, and you can save money by buying when you’re younger and in better health

  • Even if you don’t need life insurance now, you should get a policy sooner rather than later to lock in low premiums

Buying a life insurance policy is a smart move that ensures financial coverage for your loved ones. How much life insurance you need will vary based on personal and financial circumstances, but you do need enough to replace your income and cover your dependents' expenses, including future ones. Nicholas Mancuso, the senior operations manager of Policygenius' advanced planning team, suggests people aim for 10-15 times their income. This number is based on Policygenius quoting data and accounts for estimates in inflation, market returns, and average household expenses.

Policygenius' free life insurance coverage calculator can help you figure out how much life insurance you need and how long your coverage should last.

Read on for considerations you should take when you’re shopping for life insurance coverage and an example of how to calculate coverage for an average American household.

What is the ideal amount of life insurance coverage?

Term life insurance is available between $20,000 and $10 million, but the amount of coverage you can qualify depends on your income and overall net worth (someone with a net worth of $100k would not be able to obtain a $10 million policy, for example).

According to Policygenius data from active policies in October 2020, people in their 30s, 40s, and 50s most commonly purchase policies that provide between $250,000 and $1 million in coverage. Keep in mind, these coverage amounts are how much people elect to buy, but they don’t necessarily reflect how much coverage is ideal.

Follow these steps to find out how much life insurance coverage you need:

  • Tally up your resources (after-tax income, liquid assets)
  • Expenses + debt = financial obligation
  • Financial obligation - liquid assets = coverage gap
  • Coverage gap = how much life insurance you should get (plus an additional sum to ensure a financial cushion)

Resources

Essentially, you’ll need to calculate your annual income and how much you own in assets to determine the resources you provide for your family.

Imagine a fairly typical American family: a four-person household comprising two parents and two kids. Assume you earn $65,000 a year and have assets totaling an additional $20,000. These are your resources.

ResourcesAmount
Income (before tax)$65,000
Income (after tax)$50,000
Assets$20,000

What financial obligations do you need covered?

Adequate life insurance coverage involves taking stock of everything you pay for or would need to pay for in the future. If you aren't sure where to start, consider the following:

Expenses

Your expenses — including the cost of raising children and your debt — should be factored into your life insurance coverage amount.

Earlier this year, the USDA estimated the cost of raising a child was nearly $13,000 annually for a child born in 2015. Adjusting for inflation, the figures below are based on a $15,000 cost per year for each child until they turn 18.

ExpensesAmount
Five years of household support ($50,000/year income)$250,000
Raising two kids$467,220
College tuition$320,000
End-of-life expenses$10,000
Total expenses$1,047,220

The college tuition cost assumes each child attends a private, out-of-state, four-year university. End-of-life expenses based on data collected by the National Funeral Directors Assocation for the U.S. funeral market.

Debts and liabilities

If you die with outstanding debt, your survivors may be responsible for all or part of it if they co-signed the loan. This could mean your spouse who co-signed your mortgage or your child who cosigned a student loan might end up bearing the financial burden. They will not be responsible for any debt they haven’t co-signed.

You want to leave enough for your beneficiaries to continue paying off loans, especially if they were secured by collateral that your dependents need to continue using, like your home or the family car. Even if they don’t live in the mortgaged house or drive the car, they may want to inherit either of these in the future, but creditors will have first dibs and may be able to seize the assets to recoup debt payments.

Average debtAmount
Credit card$6,194
Mortgage$256,663
Auto loan$19,231
Total debt$282,088

The costs above are based on data compiled by Zillow in September 2020 and Experian in 2019 and can vary depending on each person’s individual circumstance

Adding your total expenses and debt gets you your total financial obligation, which is about $1.33 million here. Next, subtract your liquid assets ($20,000) from that amount.

Dependents

Factor in the cost of raising a child or caring for an aging parent. If you have any dependents, you may need to increase your policy amount by several hundred thousand dollars.

Different circumstances necessitate different coverage needs. Whether you’re an expecting parent or empty-nester, there’s an appropriate amount of life insurance for your specific needs.

College expenses

If you have kids, you might want to factor in the cost of a college education in your decision to get life insurance. Higher education can provide upward mobility and a comfortable life for your children later on, but paying tuition can be one of the biggest expenses of adult life.

Plan for what college will cost in the future, and expect it to cost more than it does today. According to the College Board, in the last decade, the average tuition at a four-year private college went up by more than $6,000.

Financial cushion

A 2020 study by the Life Insurance and Market Research Association (LIMRA) and Life Happens found that 44% of people would feel a financial impact within six months if their family’s primary wage earner passed away, and 28% would feel an impact within a month. When considering how much life insurance coverage you need, take stock of what you provide for your family. That might include necessities like food and medical expenses, or discretionary costs like family vacations. To get an idea of how much your loved ones depend on you, add up your monthly bills and fixed expenses.

End-of-life expenses

The average cost of a funeral ranges from $8,000 to $10,000, once you factor in the funeral home and burial costs, like the casket. Many policyholders work these final expenses into their coverage so their families don’t bear a financial burden on top of the emotional toll of losing a loved one.

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Personal considerations

While financial obligations are important, there are also factors to consider regarding your personal situation that may make a life insurance purchase seem more logical:

Health and age

Your health and age will determine not only how much insurance you should buy, but how long your coverage should last. The older you get, the less coverage you need — you will hopefully have less debt and fewer dependents to support.

However, while age is an important consideration when setting your coverage amount, it is not a reason to put off getting a policy. Life insurance rates increase 4.5-9% every year you age. After all, the older you are, the closer you are to death, and a higher likelihood of death results in higher premiums.

If you purchase a policy when you’re young and healthy, you’ll get a more affordable premium for a potentially larger amount of coverage. For that reason, it’s best to lock in the lower rates as soon as you can.

Affording life insurance

How much life insurance can you afford? A life insurance policy isn't of use to you if you can't pay the policy premiums. Higher coverage amounts and longer term lengths equal higher premiums.

You will need to decide between term life insurance and whole life insurance. Term insurance lasts a set number of years and then expires; whole life insurance lasts as long as you pay the premiums. Whole life insurance can be five to 15 times more expensive than a term policy, so most shoppers — especially those on a budget — should opt for term insurance.

Fortunately, term life insurance is more affordable than many people think. For example, according to Policygenius quoting data from October of 2020, a healthy 30-year-old male in Ohio will pay $38.26 per month (on average) for a $750,000 policy that lasts 20 years. You can also minimize the cost by opting for a smaller coverage amount or a shorter plan.

These costs are based on policies from our 11 partner life insurance companies: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, Transamerica.

The exact price of a life insurance policy depends on a number of individual factors including your medical history, lifestyle, and driving record. A licensed insurance agent or broker can talk you through shopping for life insurance and get you personalized quotes.

Financial considerationCalculationAmount
Financial obligationExpenses + debt$1.33 million
Coverage gapFinancial obligations - assets$1.31 million

What's left over is a $1.31 million coverage gap. This is how much life insurance you should buy.

After you’ve purchased your policy, you may find that your needs have changed, so you can adjust your coverage with a life insurance rider. Insurance riders are provisions to your policy that could come at an added cost.

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The risks of not having enough life insurance coverage

Not getting a face amount or term length that matches your life insurance needs puts your loved ones at financial risk. Without the right coverage amount to replace your income, your family may not be able to keep up with everyday expenses, plan for the future, or pay for your final expenses, and they may even lose their home or car due to your outstanding debts.

Who doesn’t need life insurance?

Your need for life insurance depends on whether you can afford the premiums with your income.

Here are a few instances in which you might not need a policy:

Low-income earners

Those with a low income may have a hard time finding room in their budget for a policy. However, term life insurance, in particular, is more affordable. To minimize the cost, you can opt for a lower life insurance face amount or a shorter term length.

For some, life insurance might still not fit into their budget, in which case it's better to focus on meeting your immediate needs. If you’re able to opt-in for an employer-sponsored life insurance policy, you can still get some coverage to protect your loved ones.

Young singles

If you’re single, and don’t have kids, you probably don’t need much life insurance — but you still want to be prepared if that ever changes.By getting life insurance now and locking in lower rates while you’re young and healthy, you’ll spend less over the course of your life than you would if you got life insurance much later.

Even if you don’t have anyone who would financially suffer in the event of your death, you could always leave your life insurance death benefit to a charity or institution of your choice by naming it as your beneficiary. You can change your beneficiary at any time — and you should with any big life event, such as getting married or having a kid.

Group life insurance participants

Some workplaces offer subsidized coverage through a group life insurance plan, so you might not need to buy your own individual policy. However, coverage provided by your employer usually doesn’t meet peoples’ needs and is no longer valid if you change jobs, so buying your own coverage supplements your employer’s plan and ensures you don’t lose coverage down the road. Check with your benefits administrator to see what your coverage options are.

Self-insured

Those who are self-insured or have the funds and means to stay afloat and provide for themselves and their family may not need life insurance. This might be a retiree who is financially unburdened and doesn’t support anyone or the fabulously wealthy who have enough funds stashed away to provide for their entire family.

Life insurance interstitial

How much life insurance you need depends on your individual financial circumstances and the needs of your loved ones. Your life insurance coverage should account for your income, financial obligations, and building a cushion for your dependents. Getting coverage that is 10 to 15 times your income is a good rule of thumb, but an independent life insurance agent at Policygenius can work with you to determine how much life insurance coverage you should get and what policy best suits your needs.

FAQ

Do I need life insurance?

If you have any family members or dependents that would suffer financially in the event of your death, you need to get a life insurance policy to protect them.

How do I calculate how much life insurance I need?

The face amount of your life insurance policy should equal your coverage gap, which is your financial obligations and debts minus your assets. This is the amount your loved ones will need to sustain their lifestyle and pay off your outstanding debts.

When should you get life insurance?

Even if you don’t have an immediate need for life insurance, you should get coverage as soon as possible. The cost of life insurance increases as you age and your health worsens, so purchasing a policy while you're younger is the best way to lock in low rates.

Insurance Expert

Nupur Gambhir

Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius in New York City. Previously, she has worked in marketing and business development for travel and tech. She has a B.A. in Economics from Ohio State University.

Insurance Expert

Amanda Shih

Insurance Expert

Amanda Shih is an insurance editor at Policygenius in New York City. Previously, she worked in nonfiction book publishing and freelance content marketing. Amanda has a B.A. in literature and communication from New York University.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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