Having the right amount of life insurance coverage is essential. It allows you to have peace of mind, knowing that your family will be safe in the event you are no longer around.  

Proper life insurance planning guarantees that your family won’t have to sell their home, work two jobs, and struggle to pay bills with you gone. Additionally, life Insurance can make sure that your children have the money necessary to attend college even if you aren’t there to see them off.

But how can you be sure that you have enough life insurance coverage? How much life insurance do you need?

Quick Article Guide:  

• • How Can I Calculate How Much Life Insurance Coverage I Need?
  • Free Life Insurance Needs Calculator 
  • What Should I Take into Consideration When Calculating My Needs?
  • How Much Life Insurance Do I Need for Each Stage of Life?  
  • How Much Will Coverage Cost at Each Age?
  • What Happens if You Do Not Have Enough Coverage?
  • Why Should I Speak With an Independent Agent?

How Can I Calculate How Much Life Insurance Coverage I Need?

There are two main ways that you can calculate your life insurance needs:

• • Simple Income Replacement
  • Multi-variable Approach

We went much more in depth on these methods here. To summarize, these calculation methods really depend on two major factors: dependents, and debt.

Basically, with the simple income replacement model, if you are only concerned with replacing your income for your family in the event of your death, all you need to do is calculate how long they will need to depend on your income, how much they need per year, and then multiply it together to get the total amount of money your policy should have as a Death Benefit.

However, if you are like most Americans, this model probably won’t cut it, because you have debts on top of this existing income that need to be accounted for in the event of your death. You probably will also want to factor in things such as paying for your kids to go to college, paying off your mortgage, long term care costs for your remaining spouse, and more. This is where the Multi-variable Approach comes into play.

Free Life Insurance Coverage Need Calculator Tool

What Should I Take Into Consideration When Calculating My Life Insurance Needs?

In order to figure out how much life insurance coverage you need there are a few important factors that you should take into consideration in addition to the basic income needs of your family.

1. Financial Stability for Your Family

Say you bring home $50,000 per year and your spouse brings home the same. If you pass away, your spouse might be able to increase the number of hours worked, but it wouldn’t necessarily be possible to compensate for the $50,000 loss from your income.

In order to compensate for this, your life insurance coverage should factor in the following costs:

• • Replacing lost income for a certain number of years
  • Paying for your spouse to return to school in order to receive more education (if necessary)
  • Costs of nanny, room, board, lost income, etc… if your spouse goes back to school

One way or another, this income will have to be replaced in order for your family to maintain the same standard of living. This can come in many forms, but no matter what, it will cost money. For people with families, accounting for these costs with your life insurance policy should be your #1 priority.

2. Factor in Your Existing Debt

When trying to figure out how much life insurance coverage you need, take into consideration your existing debt. The most common debts that people have includes:

• • Mortgage loans
  • Credit card debt
  • Car loans
  • Medical bills
  • Small business loans
  • Student loan debt

While this debt may not be something you think about often in your daily routine, as it has been factored into your monthly expenses, without your income, these bills may be too much for your remaining spouse to handle.

In order to ensure the financial security of your family after your death, it is very important to include existing debt into your life insurance needs.

3. Your Current Health vs. Future Health

Look, none of us like to admit it, but we are getting older every single day. And typically, with old age, comes more health problems. Ultimately, health problems effect the amount, and types of life insurance coverage you can get.

In order to make sure that you provide yourself and your family with the right amount of life insurance coverage, it is essential that you factor in the way age can affect your bills.

Bills like this can cost families upwards of $6,000 – $10,000 per month on average. On top of the fact that your income will no longer be dependable in this situation, it is easy to see how this can catch a family by surprise and really cause financial turmoil.

So, when purchasing a life insurance policy, you always want to factor in that one day, you or your spouse, or potentially both of you may need Long Term Care.

There are two main ways you can do this:

• • Purchasing a Long Term Care (LTC) Rider
  • Purchasing an LTC Policy

More often than not, the LTC Rider on most policies will be enough, but for some people who have policies that do not allow for this rider, or who need supplemental coverage, there are life insurance policies that are strictly designed for LTC needs.

4. Income Need of Dependents

When trying to calculate how much life insurance coverage you need, be sure to also consider the financial needs of your dependents. This includes your spouse, children, and anyone else that depends on your income.

First and foremost, you should consider basic income replacement. This can be calculated by taking the the number of years you have left until you retire and multiplying it by your annual salary.

After this, you should consider costs of monthly and annual bills such as:

• • Mortgage
  • Utilities
  • Car Payments
  • Other Insurance
  • Food
  • Etc…

Next, you want to factor in costs for your children. Consider projected costs like:

• • Sports
  • College Tuition
  • Medical Bills

Also be sure to consider the age of your children, and how long they will need to be provided for in the event of your death. For each of your kids, you want to calculate out the cost through at least age 18, if not through college.

5. Potential Disability or Illness

Another unpleasant reality that we probably never think about in our daily routine is the possibility of becoming disabled or severely ill.

While life insurance policies pay out in the event of your death, an illness or disability can exist for years before it finally takes you. This often leaves family members with lost income, increased bills, and no way to pay for it.

As a result, many life insurance policies offer a free accelerated death benefit or ABD Rider, that allows the insured to access a portion of their life insurance policy’s death benefit while they are still alive – in the event of a terminal illness. This money can be used for:

• • Medical bills
  • Treatment/time off work to recover
  • Paying off the house
  • Taking a once in a lifetime vacation
  • Etc…

There are also riders that cover for Disability, and Accidental Death. Each of these riders often payout in multiples of the original policy death benefit, but tack on additional monthly premium to your policy.

When you don’t have life insurance and become terminally ill, you have very limited options available to you – and they are costly, for very little coverage.

These are just a few examples of why understanding life insurance policy riders is essential to figuring out how much life insurance you need. 

6. Creating an Estate or Trust

Should you wish to create an estate, a permanent life insurance policy can be purchased to create a trust or an estate when you pass away. The most common are:

• • Special Needs Trust
  • Irrevocable Life Insurance Trust (ILIT)

With an ILIT, the money is held in trust until you pass away. The appointed trustee then uses money to pay IRS/State, to settle tax obligations to prevent surviving family from selling assets to pay IRS.

With a Special Needs Trust, money is used by trust to provide a source of income to a special needs child without affecting their needed government benefits (if money is left behind as cash and not in trust, it is considered an asset by the IRS and could cause cancellation of Government benefits).

There are plenty of other reasons that you may want to establish a trust. For instance; to protect financial assets such as real estate, valuable possessions, or to pass down a business to a beneficiary.

Whatever your reason may be, whole life insurance policies offer a unique and highly secure way to create unbreakable trusts, that will be fought for on behalf of billion dollar insurance corporations.

7. Accumulating Cash Value – Permanent Life Insurance 

Life insurance can also be used as an investment vehicle, and overtime you can use your policy to accumulate cash value. Permanent life insurance policies allow you to do this. 

This is essentially a separate account which you can borrow against, interest free. Any additional funds in this account are paid out with the death benefit in the event of your death.

The risk with these policies is that if the loan doesn’t get repaid, your family will lose the coverage they need. Also, if the market doesn’t perform well, your policy could become underfunded or your cash value could be eaten up by rising premiums. Universal Life policies have an adjustable COI or cost or insurance that can raise at anytime.

8. Leaving a Legacy

You can choose to leave behind an inheritance for your children or grandchildren to help with college tuition, buy a first home, etc. This can also be used to settle any IRS or State levied inheritance or estate taxes.

Remember, life insurance is not subject to estate or inheritance taxes unless your estate (all of your assets) is worth more than the Federal Exemption of $11.4m. (less than .5% of the US).

This type of life insurance coverage typically comes in the form of a rider or an additional policy, which are both very cheap. Most policies like this go up to about $50,000 in coverage. However, companies like AIG and Gerber have specific policies designed for insuring children and grandchildren.

The way this works is that throughout their life (until age 18), the children are insured by the policy, which will payout to a beneficiary in the event of their death. During this time, the premiums accumulates cash value. Once the child turns 18, they can use the policy to their advantage in one of 2 ways:

• • Use the cash value accumulated to fund college, etc…
  • Upgrade the policy in order to get cheap coverage from a young age

9. Consider Future Needs

When figuring out how much life insurance you need, it is also important to factor in how much your needs may change over time. Consider things like:

• • A new home
  • More children
  • Changes in health
  • Retirement planning
  • And much more…

All of these affect life insurance needs in the future. Because a lot of this can be unforeseen, or blurry at best during the time of purchasing life insurance, there are a few techniques you can use in order to add more coverage as needed.

How Much Life Insurance Do You Need at Each Stage of Life?

At each stage in life, there are different levels of coverage best suited for you. There are also different companies that favor different age groups. Understanding what your general needs are in each age group, and what companies are best for you at each age makes it easier to calculate your life insurance needs.

Want to learn more about each of these top life insurance companies? We have taken the time to independently audit each of these companies in order to give honest feedback to you. Check out some of our reviews of their policies, customer service, and rates:

• • Banner Life Review
  • TransAmerica Review
  • Pacific Life Review
  • Protective Life Review
  • Prudential Life Review

Keep in mind, that as we get older, we also have different life insurance term lengths that are available to us. Depending on your age, when you plan on retiring, and how long you need insurance coverage for your dependents, certain term lengths may be better for you than others.

How Much Life Insurance Coverage Do I Need at My Age?

As you have seen, quite a bit of calculation goes into knowing how much life insurance you need.

If you are looking to find out what coverage amount is right for you, the best way to do so is to use the multi-factor calculator from above.

Why is it Important to Know How Much Life Insurance You Need?

Without the right amount of life insurance coverage, terrible things can happen.

Consider this horror story:

A man and his wife, with 4 children were not properly insured. With a substantial range in ages, one child was about to head off to college, with another just a few years behind. The other two younger children were still in grade school.

Without warning, his wife passed away from a heart defect, leaving the family devastated. While her husband earned more income than her, the life insurance policy they had taken out was one provided by their employer, and they never once checked to see if the amount of coverage was sufficient for their family’s long term needs.

Long story short, it wasn’t. The first child went off to college, but as the second started her first year, the money for college tuition ran out. The remainder of the mortgage became problematic to cover, with only one income source because the death benefit from her life insurance policy only lasted 3 years.

This led to the family nearly losing the house, the younger three children not having money for college and being forced to work two jobs and take out loans, and caused a great deal of strife within the family.

Why Speaking With an Independent Agent is Essential

When it comes to assessing your life insurance needs, there is no one more qualified and reliable than an independent life insurance agent. This is because, unlike captive agents, independent agents represent dozens of the best life insurance companies, and can identify the best policies for you at each stage.

At JRC Insurance Group, we work with over 50 of the best life insurance companies on the market, in order to help our clients get the best coverage possible for their specific situations.

If you would like to speak with an experienced agent that can help you calculate your life insurance needs, please give us a call, toll free at: 855-247-9555. Or, send us a message with your specific questions here, and get in touch with an expert who can help.