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How much life insurance do you need?

If you’re considering life insurance, congratulations. Life insurance can help you protect your family financially when you aren’t around. It pays them money (called a “death benefit”) they need to cover funeral expenses, mortgage payments, car payments, and other monthly bills. It can also help with big, long-term expenses, like your kids’ education. The money your loved ones receive is almost never counted as taxable income. So, the person you choose to receive the payout generally gets the money tax-free.

There are different types of life insurance to choose from. If you’re not sure what type is right for you, our Learn About Life Insurance main page, and our posts What is term life insurance? and What is “whole life” life insurance? will help you understand your options.

Whichever type of insurance you choose, you will need to pick a coverage amount. When we say, “how much life insurance do you need?” what we’re really saying is, “How much money will your family need to keep going when you’re gone?”

We’ll show you several ways to figure out your ideal coverage. But remember: Any amount of life insurance is better than having none at all. Don’t feel bad if you can’t afford the full recommended amount of insurance coverage. Even a small policy can make a big difference for your loved ones.

Ways to calculate your insurance coverage

Simple Calculation

This formula will give you a general idea of how much coverage you need.

  1. Determine your annual gross income, which is the total amount you make each year before Uncle Sam and your employer take money out for taxes, unemployment insurance, health care coverage and anything else.
  2. Multiply that number by six. The number you get is the minimum recommended coverage for your family. For example, if you make $50,000 a year before taxes and other deductions, you should have $300,000 ($50,000 x 6) in life insurance coverage. (Multiply by eight if you want the ideal recommended coverage.)

Alternate Calculation

This formula requires digging up a few more numbers and doing a little more math. But it will give you an even better sense of your life insurance needs.

  1. Determine your annual gross income, which is the total amount you make each year before Uncle Sam and your employer take money out for taxes, unemployment insurance, health care coverage and anything else.
  2. Multiply that number by five. For example, if you make $50,000 a year, your number will be $250,000 ($50,000 x 5).
  3. Now add the amount you still owe on your mortgage (if you own a house or condo), the total amount of your personal debt (car loans, credit cards, etc.) and any anticipated future expenses you consider important (for example, college education for a child).
  4. Take the amount you calculated in step 2 and add it to the amount you calculated in step 3. The number you get is the amount of insurance coverage you need.

Or you can add up your family needs

This way of calculating the amount of life insurance you need focuses on the expenses your family will have when you’re gone. You can put those expenses into three buckets.

  1. Funeral and other expenses. Like many things, the cost of a funeral and burial keeps going up. Today, they can total more than $10,000.1 You’ll want to be sure those final expenses don’t leave your family in debt.
  2. Ongoing needs. This is the money your family needs to pay the bills, put food on the table, and cover other day-to-day and month-to-month expenses. You can think of it as your monthly budget.
  3. Special funding needs.These are the “big picture” and long-term expenses that matter to you. They can include future college tuition and money you might want to leave to loved ones or charities.

Add the totals for all three buckets and purchase a life insurance policy in that amount.

Final thoughts and helpful tips

These approaches will give you a ballpark idea of how much life insurance you need. But unless you’re a financial whiz, the best way to get the most accurate possible number is to talk with a financial or life insurance professional. Here are a few other tips.

  • Review your life insurance needs every year. If you haven’t had any big changes your life, your insurance needs probably haven’t changed. But if you have had a child, bought a home, or made other changes in the amount of money you spend, the things you own, and the amount you owe, it’s a good idea to review your coverage.
  • Talk it over with your spouse or partner. He or she can help you figure out how much the family would need to keep going financially without you.
  • Getting too much coverage is better than getting too little. Keep in mind that prices tend to go up and that few of us can complain we have too much money. Calculating how much insurance you need and then adding a little cushion (if you can afford to) is a good idea.
  • Find the right type of policy for you. “Term” life insurance only covers you for a specific time period (or term) but is designed to be more affordable than “Whole Life.” So, it’s often a good option for people on a tight budget. Whole Life does it what its name says—it covers you for your whole life, no matter how long you live. The “premium” you pay for it never goes up. Besides that, it typically builds what’s called a “cash value.” That’s money you can borrow from the policy.

How to learn more about life insurance

Life insurance may seem complicated, but it’s not that hard once you know the basics. Of course, we are happy to help. You can also use the TruStage Life Insurance Calculator to compare different types of insurance and learn more about your options.

Keep reading:

What are the different types of life insurance?
It may seem simple but understanding insurance types can also be confusing. We’ve broken down a few of the most common types of life insurance policies to simplify things.

What should I look for in a reputable insurance company?
Cost isn’t everything in choosing the best life insurance policy. There’s also a lot to be said about choosing an insurance company you can really trust.

How much life insurance do you need?
This article walks you through several popular methods for estimating how much life insurance you need to ensure your family’s future.

Life insurance when you're young
It’s tempting to put off buying life insurance when you’re young, especially if you’re just starting out and money is tight. But there are two good reasons to buy life insurance now instead of waiting.