How Much Life Insurance Do I Need?

Life Insurance

You’ve decided to look into purchasing life insurance. You’ve looked into the different types of life insurance, but are left wondering, “How much life insurance do I need?”

Life insurance is one of the most important and emotional financial products you will ever purchase.

However, according to Motley Fool:

  • 17% of Americans are convinced they don’t need life insurance.
  • 15% of Americans don’t have a policy because they don’t know which kind to get.
  • An estimated 12% of Americans don’t have life insurance because they have no idea how much coverage they need.
  • For 11% of Americans, a lack of life insurance is attributed to not having had the time to figure it out.
  • 11% of Americans say that the confusing nature of life insurance has driven them to avoid buying a policy.


Unfortunately, insurance brokers know this is the case, so they often sell a life insurance policy that doesn’t meet the individual’s unique needs.

Asking “How much life insurance do I need?” puts you in the driver’s seat.

It shows you are trying to make an informed decision based on your personal circumstances – not merely accepting whatever an insurance broker suggests or whatever group life insurance your employer offers.

Life Insurance Is Not a One-Size-Fits-All Product

While you are on the right track asking, “How much life insurance do I need?” it is important to recognize that some insurance agents will try to get you to purchase a certain life insurance policy without even answering this question.

For this reason, consumers are oversold or undersold life insurance.

While 52% of Americans have purchased life insurance, recent data suggests 50% of those Americans are currently underinsured.

As we explain in our Ultimate Life Insurance Buyers’ Guide, life insurance isn’t a one-size-fits-all product that should be sold to you.

Rather, because everyone’s needs are different, the type and the amount of life insurance that you should obtain will depend on a variety of factors that are specific to you.

Only you can answer the question, “How much life insurance do I need?”

Who Needs Life Insurance?

The answer to the question of how much life insurance you need begins with figuring out if you need life insurance in the first place.

The basic rule of thumb is that you need life insurance if your death will financially impact or burden your family.

According to Forbes, “A recent LIMRA survey found that 44% of households said they would face financial hardship within six months if the primary wage earner were to die prematurely. For 28% of households, financial hardship would hit within one month.”

While this number focuses on the primary wage earner, it is important to recognize that, even if you are not the primary wage earner, your family may still suffer financially upon your death.

For example, while a stay-at-home mom may not receive a paycheck, there will be costs that need to be covered if she passes away, such as childcare.

Here are some categories that make life insurance beneficial:

  • Your marital status.
  • Whether or not you have children or dependents.
  • Whether your pension or income source will continue for your spouse when you die.
  • If you expect to owe estate taxes.
  • If you have large debt obligations, such as mortgages, credit card debt, or personal loans.
  • If you own a business where a partner or joint owner could purchase your share of the business upon your death.
  • Whether your loved ones would suffer a drastic reduction in their lifestyle upon your passing without some type of additional financial support.


To sum it up: If you have any financial obligations that your loved ones will need to cover after you’re gone, then you need life insurance.

How Much Life Insurance Do I Need?

According to Best Life Rates, 52% of consumers don’t purchase life insurance because they are uncertain about the products or the amounts necessary to cover what their family needs.

Removing uncertainty regarding “How much life insurance do I need?” begins with looking at the big picture.

What is your overall purpose in purchasing life insurance?

How does life insurance fit into your financial planning?

A 2020 survey by LIMRA and Life Happens found that people tend to purchase life insurance for the following reasons (participants could choose multiple reasons in the survey):

Burial/final expenses: 84%
Supplement retirement income: 57%
Transfer wealth: 66%
Help payoff mortgage: 50%
Replace lost wages/income: 62%
Home expenses: 48%
Tax-advantaged investment: 45%
Estate taxes: 43%
Pay for college: 37%
Business purposes: 28%
Charitable gift: 27%

Factors to Consider

Ultimately, the main reasons people purchase life insurance are to replace the income of the primary wage earner, pay off debt (mortgage, college, car, etc.), and cover final expenses (burial, estate taxes).

Keeping this in mind, determine how much money you need to cover these three areas.

STEP #1

Determine how much money is needed to replace income. Start by multiplying your annual income by the number of years you want the income to continue.

STEP #2

Assess your debt or the financial obligations your family will be stuck with after you pass away.

Add up your mortgage, credit card debt, school tuition, loans, etc.

In addition, factor in the amounts for future expenses you’d like to cover, such as a child’s college costs or wedding.

STEP #3

Consider final expenses, such as funeral costs.

According to the National Funeral Directors Association, “The national median cost of a funeral with viewing and burial for calendar year 2019 was $7,640. If a vault is included, something that is typically required by a cemetery, the median cost is $9,135. The cost does not take into account cemetery, monument or marker costs or miscellaneous cash-advance charges, such as for flowers or an obituary.”

Many families do not have thousands just sitting around to pay for final expenses.

Having the right amount of life insurance may provide the funds necessary to cover final expenses without causing your family stress or forcing them to dip into their savings or put it on a credit card.

[Related Read: Is Burial Insurance Worth It?]

STEP #4

Add the totals needed for income replacement, debt, and final expenses to determine the estimated amount of life insurance you need.

Do the Math

Doing the math above, you now have the formula to get an estimated answer to the question, “How much life insurance do I need?”

You can get a more fine-tuned answer by factoring in additional funds your family may use to cover these needs.

For instance, many individuals have group life insurance through their employers.

Policy Genius reports, 54% of American adults have life insurance. However, of Americans with life insurance, 27% “only have group coverage — which usually isn’t enough (and is rarely portable).”

It’s better than nothing, but you shouldn’t expect it to cover the big three (income replacement, debt, and final expenses).

However, you should factor in your group life insurance policy amount to offset how much you need for your personal life insurance policy.

You can also offset costs of personal life insurance if you have available assets your family may use to meet needs, such as stocks and mutual funds, retirement savings, an IRA, 401(k), etc.

Now take your initial estimated life insurance needs and SUBTRACT your current life insurance policies and available assets.

This sum is the true answer to the question, “How much life insurance do I need?”

The Cost of Life Insurance

The cost of life insurance varies significantly depending on several factors, such as your age, health, and the type of life insurance you choose.

There are many types of life insurance policies, so you should search until you find the policy that works best for your financial needs.

[Related Read: Types of Life Insurance Explained]

Every year you procrastinate buying life insurance, the more expensive it gets.

Your health also plays a key role in how much your insurance will cost, but you may be able to get a better rate on your life insurance if your health improves.

Many people don’t get life insurance because they think it’ll be too expensive. But, if you know how much life insurance you need, you can avoid paying too much.

Stop Shopping Blind When It Comes to Life Insurance.
Get Your Copy of Our Ultimate Life Insurance Buyers’ Guide.

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