How much life insurance do I need?

January 15, 2019
Melissa Schreur
how much life insurance do i need

A rule of thumb for life insurance is to purchase 7-10 times your income. While this may be a quick and easy way to calculate the amount of life insurance needed, there is a more accurate method.

It’s best to use a life insurance needs calculator. This is also referred to as a needs analysis or calculation formula. To make it easy you can use an online life insurance calculator…like the one on this page!

You should use this calculator before getting insurance quotes for term life insurance. The life insurance calculation formula will ensure your beneficiaries can be debt free and have income replacement if you die.

Using such a calculator helps you find our for free what face amount to have on your policy.

Online Life Insurance Calculator

The dave ramsey recommended life insurance amount makes sure that your family members have coverage for future expenses only. He recommends steering clear of permanent life insurance plans. Although some people may find they have a need for long term coverage. If that’s the case, don’t worry as there are some affordable plans out there that don’t have large costs or confusing fees.

What if your current life insurance coverage is out of date? Do this free 5 minute coverage checkup! Many financial professionals suggest reviewing your life insurance needs every few years or upon changing life events.

There is a common misconception that life insurance is a one an done type of policy. Throughout your life, your needs change with your finances. That’s why it’s nice to have a calculator like this one handy.

Let’s breakdown the key areas of a life insurance death benefit calculator and some tips to using one.

how much life insurance do I need

Final Expenses

Most people think of this as burial or cremation costs. However, many don’t realize there’s more to end of life expenses than just a funeral.

Other final expenses that can arise would be uncovered medical bills or estate settlement costs. If your body needs to be transported due to a medical flight in an accident or back home for a funeral it can be a hefty bill.

It’s best to leave a buffer for your loved ones who will be responsible for such costs. Cremation can cost as low as $2,000 and burials $15,000 but it varies by location.

Outstanding Debts

Nine times out of ten consumers want their debts paid off if the die. Usually the biggest debt is a mortgage balance. Since having a roof over your head is pretty important, it’s a good to ensure your family can stay in the home.

Some people decide not to have all or any of their debts paid off. The beauty of using a needs analysis is that you can choose and customize it how you wish. You may be satisfied with the mortgage protection option that is included with your home loan. Keep in mind that only pays the mortgage and is not competitively priced compared to life insurance.

If you have a co-signer on any of your loans, than be sure to include the total balance. Leaving an unpaid debt behind to someone else isn’t very nice!

College Funding for Children

If you’d like to be sure your surviving children can attend college, it can be part of your life insurance. Most parents like to include this!

If you are saving for college in a 529 or similar plan, then be sure you understand how the payout works if you pass away.

When you select college funding in your life insurance needs analysis the age and school type for each child. The formulas factor in the inflation rate for college costs based on how they have been historically. They will also consider the difference in cost between public and private schools.

Usually the cost is for a four year program. You can always use a separate college cost calculator as a supplement to see how closely the numbers compare in the results section.

Income Replacement

Consumers often get tripped up at this section. They get overwhelmed or over analyze when considering what their family might need if they pass away.

The thing is there is no perfect way to calculate this because no one knows when they will die and what their financial situation will be at that time.

The first step is to enter 60-75% of your gross(pre-tax) annual salary. This will allow your survivors to continue living according to their current lifestyle.

While this may not be necessary, it’s hard enough to adjust emotionally after losing you. Why complicate matters by making them completely change their way of living? Many counselors don’t recommend making major decisions within the first 3 months following a tragedy.

Secondly, choose how many years you’d like your surviving dependents to received this income. If you have younger children than you want to choose a longer time frame. If your spouse is dependent on you and you don’t have enough or any assets to assist them, than consider how long they’ll need it.

Choosing the years for income replacement is very personal. Figuring the income replacement for stay at home parents can be challenging but nit impossible. For help with this a financial adviser or life insurance agent can assist.

It’s up to you whether or not you’d like to deduct your survivors social security benefit. You can run your social security benefit statement online to see what they would receive.

Very few calculators have this included as a deduction. You have to manually figure the social security survivor benefit and then subtract it from your annual salary amount discussed above. Lot’s of people don’t feel these benefits are enough and consider them supplemental. Especially since the program isn’t always reliable.

Assets & Current Coverage

Thus far we’ve discussed the sections that calculate how much money your loved ones would need if you died. Now we will discuss how to subtract what you already have in place to provide these funds.

Your assets would be savings, investments, retirement accounts, etc…Think any account that has money which will be closed and paid out when you die.

Then you enter the current life insurance coverage you have in force already. That is unless you plan on replacing the plan. If so, do not enter it. If you want to factor in your coverage from your job you can add that as well.

Spouse’s Income, Inflation & Growth Rate

The last section of this life insurance needs analysis worksheet reviews the following: 

  1. Whether or not your spouse will work after you pass away
  2. A customizable inflation rate for cost of living increases
  3. A customizable growth rate for after-tax net investment yields

Feel free to adjust all of these sections until you find a result you are most comfortable with for a life insurance death benefit. Make notes and share with your agent or financial adviser.

You are in control how much coverage you purchase. These formulas are meant to give you a good idea of what financial items can be covered with a life insurance policy.

An important tip is that it doesn’t cost make a huge difference in price for a plan when quoting face amounts that are within $50,000 or $100,000 of each other. So don’t overthink this! Most importantly, don’t be cheap and sell your family short.

Once you narrow the benefit down, it’s time to get quotes for coverage.

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Melissa Schreur

Melissa Schreur has 16+ years helping consumers choose the best insurance protection. As a military spouse, she is dedicated to delivering world-class service to her customers. Insure The Heroes Life Insurance Agency is owned and operated by Melissa. She helps military families(past & present), parents and business owners secure affordable term life insurance coverage.