For many of us, making sure our families are protected in the event of our untimely death is one of the most important things we can do. How do you know how much life insurance you need? In this blog, we will break down what you should consider when determining how much life insurance is right for you and your family.
Let’s Talk Finances: What Things Impact How Much Life Insurance I Need?
Everyone’s financial situation is unique. Therefore, so are the factors that determine how much life insurance you need. Common factors that should be considered include:
- Income Replacement – Ask yourself if you weren’t here, how much income would my family need and for how long?
- Outstanding Debt – Life Insurance should cover major debts so your loved ones aren’t forced to sell assets or downsize.
- Dependent & Childcare Costs – If you have children, consider daycare or nanny costs, before/after school care, and college savings.
- Spouse’s Financial Situation – Could they realistically replace your income? Do they have their own life insurance?
- Existing Assets & Coverage – Subtract savings and investment accounts as you do not need to over-insure.
- Inflation & Time Horizon – $1,000,000 won’t feel like $1,000,000 in 20 years. The longer your time horizons, consider higher coverage amounts.
- Lifestyle Goals You Want to Protect – Although this is an emotional piece to the puzzle, it is still important. Consider if you want your family to stay in the same home. Avoid financial stress during grief. Give your spouse choices instead of pressure. These thoughts often justify higher coverage amounts.
- Interested in Giving Back – Did you know you can make a charity of your choice the beneficiary of your life insurance policy? This gives you the opportunity to leave a lasting legacy for others after you are gone. We would be happy to recommend some of the charities we’ve donated to as part of our Community Referral Program!
- Final Expenses – Funeral and Burial costs often range from $10,000-$20,000. Medical Bills are common at the end of life. And legal/estate settlement costs can add up quickly.
What About Net Worth?
The discussion of someone’s net worth is not directly correlated to how much life insurance they need. Here is why:
- Net worth factors in liquid assets, non-liquid assets, and debt.
- Examples of liquid assets which should deduct from your life insurance policy amount include: Cash, Brokerage Accounts, Retirement Accounts, or Emergency Savings.
- Examples of non-liquid assets which should not be deducted from your life insurance policy amount include: Home Equity, Business Equity, and Restricted Stock Options due to vesting rules.
Because of this, someone could have a high net worth but have little liquid assets. Therefore, if they want their family to continue their current lifestyle, more coverage would be needed so your surviving loved ones do not have to deal with the difficulties of accessing non-liquid assets.
So How Much Life Insurance Do I Need?
As you can see above, there is no one size fits all solution. Income Replacement is the primary driver. As a general rule, 7-10 times your pre tax earnings is a good place to start. However, it is critical to take the time to speak to a licensed agent who will get to know your unique situation and offer tailored advice for you and your family.
Here are some common life insurance calculation tools.
- The DIME Method – Debt, Income, Mortgage, Education
- The Human Life Value Method – Based on future earning potential
- The Needs-Based Method – Customized calculation based on specific family needs
For more information on life insurance types and considerations, visit FINRA’s Insurance Information Page.
Frequently Asked Questions About Life Insurance
How much does life insurance cost? Costs vary based on age, health, coverage amount, and policy type. Term life insurance is typically the most affordable option for young, healthy individuals.
Can I have multiple life insurance policies? Yes, you can have multiple policies from different providers to meet your total coverage needs.
Should stay-at-home parents have life insurance? Absolutely. The value of childcare, household management, and other contributions should be protected.
When should I review my coverage? Review your coverage after major life events: marriage, having children, buying a home, career changes, or every 3-5 years at minimum.
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The Bottom Line
The best time to verify your life insurance coverage is before you need it. We are here to help to make sure you and your family are properly protected with the right home insurance policy. Reach out to us today for an in depth conversation or click here if you prefer a fast, no obligation quote. The choice is yours and we are always here to help.