You decided you should buy a life insurance policy, but now you have a very common question: how much life insurance do I really need?
There’s no single answer to that question, but there are ways to make it easier to choose a policy that meets your current and future needs. this life insurance calculator can help.
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calculate how much life insurance you need
Here’s an easy-to-use calculator to help you determine how much life insurance you need.
basic calculation of life insurance need
You can also determine your life insurance need with pencil, paper, and this basic equation:
[financial obligations you want to cover] – [existing assets that can be used for bills] = your need for life insurance
here is what you could include in “financial obligations you want to cover”:
- Income Replacement: Multiply the salary you want to replace by the number of years you want to replace it. you want this income replacement to cover current and future expenses.
- a mortgage: you can include the balance of a mortgage so that your family can stay in their home without fear of losing it. if the income replacement (above) would already cover mortgage payments and other expenses, there is no need to add more mortgage money.
- Other Large Debts: Would your family struggle with other large debts if you were to die unexpectedly? if so, add them.
- Children’s college tuition: Add tuition money to ensure your children can afford college if you’re no longer around.
- Existing Life Insurance: If other life insurance already exists to provide a financial cushion, subtract that amount. however, be careful about relying on job supplemental life insurance, since it doesn’t go with you if you leave a job, you can’t be sure you’ll have it later.
- Savings: Subtract the savings your family would use to pay expenses. you can include retirement savings, such as a 401(k), or leave it out of your analysis if your beneficiaries want to keep that amount for their retirement years.
- 529 college savings: If you have a 529 account with money for your children, you can subtract it from your life insurance needs.
- Funeral Expenses: Many people want life insurance to cover funeral and final expenses. If this cost is not part of a larger policy, some people purchase burial insurance.
- debt: how much debt would you leave to other people? this could include credit card debt and student loans that are not forgiven upon death.
- Income: Multiply your income by the number of years you want to provide income replacement for your family. some sites recommend using the number of years until your youngest child turns 18, but we all know that children often need financial help longer.
- Mortgage: Add your mortgage balance to your running total.
- education: Add an amount that covers tuition, room and board for each of your children who will attend college. the university council regularly publishes trends in university prices.
- cover burial and other final expenses
- replace lost wages if the person dies
- transfer wealth to others
- provide funds to pay a mortgage
- supplement retirement income
- provide funds for heirs to pay estate taxes
here is what you could include in “existing assets that can be used for invoices”:
other methods for calculating life insurance needs
You may come across other methods for calculating how much life insurance you need. These typically include:
multiply your income by 10
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or by 5. or by 17. This general rule is difficult to pin down. we have seen many attached numbers. and it probably won’t help you determine an appropriate amount of life insurance. it’s best to look at your total needs and subtract assets your family could use if you died.
multiply your income by 10 and add $100,000 per child for college expenses
If you want your life insurance policy to help pay for your child’s college tuition and other related expenses, multiplying your income by 10 may not be enough. For example, if you make $90,000 a year and have two children, your total life insurance need would be $1.1 million.
This equation can offer a simple strategy for determining need, but it doesn’t take into account other expenses, assets, or unique situations. a life insurance calculator will give you a more accurate representation of your needs.
the dime method
dime means debt, income, mortgage and education. the method has to add these amounts:
The dime method is a good start for estimating your need for life insurance, but it ignores existing financial resources your family could use for expenses. by itself, it could leave you overinsured.
what is the general rule of thumb for how much life insurance you need?
A common rule of thumb to determine how much life insurance you need is to multiply your salary by ten. some experts recommend multiplying it by 5 or 7.
That may be an easy way to determine how much you need, but it’s not a good method.
The best way to figure out how much life insurance you need is to add up the financial obligations you want to cover (like income replacement, a mortgage) and then subtract assets your family could use (like savings or existing life insurance).
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If you’re not sure, talk to a financial advisor who can help you determine your needs.
why do people buy life insurance?
The reason people buy life insurance varies by race and ethnicity, according to the 2022 Insurance Barometer study by Limra and Life Happens, insurance industry groups.
Across all races and ethnicities, including Asians, Blacks, Hispanics, and Whites, two of the most common reasons people buy life insurance are:
Blacks (67%), Hispanics (69%), and Whites (55%) most often cited burial and other end-of-life expenses as their main reason for buying life insurance. Among Asians surveyed, the most common reason (46%) for purchasing a policy was to replace lost wages.
Other top reasons to buy life insurance include:
Nearly half (44%) of households said they would face financial difficulties within six months if the main wage earner died prematurely, according to the 2022 Insurance Barometer study. For 13% of households, the financial difficulties would come within a month.
the gender gap in life insurance
There is a substantial gender gap in life insurance ownership. While 51 million men said they need life insurance coverage, nearly 12% more women (57 million) said they need coverage, according to the 2022 Insurance Barometer study.
And when it comes to men and women who have life insurance, perception doesn’t always match reality. A majority of Americans (93%) say men and women should have the same life insurance coverage, according to a 2021 US Life Insurance Survey. But in relationships between men and women where both members of the partner have life insurance, nearly one in three women say their partner has more coverage.
The usaa survey also found that 81% of men say they have taken steps to prepare their family finances in case something unexpected happens, compared to 72% of women.