You already know you need life insurance in order to protect those who rely on you or your income, but how do you know how much to buy? Follow this guide in order to get an accurate estimate of protection for those who matter most.
Each person has a completely unique financial situation, so wouldn’t it make sense that everyone would have a unique life insurance need?
No matter what your situation is, life insurance can be an incredibly wise financial decision as long as you have the right coverage. So how much do you need?
To help you understand the best coverage amount for you, let’s first break down life insurance what it covers.
What is Life Insurance and What Does It Cover?
Life insurance is a contract in which an insurance company agrees to pay a specified amount to your loved ones if you were to pass away. In return, you make monthly payments to the insurance carrier while you are alive.
Life Insurance is important because it protects your dependents and those who rely on you from financial burdens that may come as a result of your passing. It can provide for things such as:
- Supplementing lost income
- Paying off your mortgage or debt
- Covering burial costs or final expenses
- College funding for your children
When thinking about how much coverage you will need, it is important to remember all of the different factors that may come into play such as your current mortgage/debt, the number of kids you have, any college funding, and the number of years until you reach financial independence. Coverage amounts can be as low as $10,000 to as high as $1,000,000, or even higher!
What Type of Life Insurance Policy Do I Need?
Life insurance policies are usually under two main categories: Term and Permanent.
What is the difference between term and permanent life insurance?
The main difference is that term life insurance covers you for a specified number of years or a term while permanent life insurance provides coverage forever.
However, these two different policies come at two completely different price points. Permanent life insurance can be as much as 8x the cost of term life insurance, so it is important to evaluate your goals.
Should I get term or permanent?
Term life insurance is the lowest cost option. It can give you a lot of coverage for a very low monthly payment while you have certain financial obligations. However, once the term expires, you will no longer have any coverage. Many people find it best to keep a term policy until they have paid off their mortgage or debt, no longer have kids who are financially dependent or are at retirement age when they will have enough in savings to support their long term goals.
Permanent life insurance comes with a higher premium, but it also provides coverage for the rest of your life. This is not always necessary for most people, but it can provide for funeral/final expenses, estate taxes or an inheritance to their descendants.
How Do I Know How Much Coverage I Need?
The optimal amount of coverage will take into account all of your financial obligations, everyone who relies on you, and any income that would need to be replaced. Many experts try to throw out a number such as 10 or 15 times your income, but this is not a good rule of thumb and does not take your specific financial circumstances into account. Here are some things to think about:
How much income would need to be replaced and for how long? Speak with those who rely on you and decide how much they would need per month in order to maintain their lifestyle. For example, if you reviewed the above section and decided you will need 20 years of coverage and your family will need $3,000 per month:
$3,000 X 12 months X 20 Years = $720,000 in coverage
Your Mortgage and Debt:
If you have a mortgage or debt, it may be best to pay for these with your life insurance policy, not to mention it can save your family a ton on interest! For example, if you need $720,000 to replace your income and you have $250,000 left on your mortgage, a $25,000 car loan and $5,000 in credit card debt:
$720,000 income replacement + $250,000 mortgage + $25,000 car loan + $5,000 credit card debt = $1,000,000 in coverage
# of Financial Dependents:
The average child will cost parents $285,000 before they reach age 18. If you have multiple children or financial dependents, be prepared to increase your coverage by a couple hundred thousand dollars.
Do you want to provide a college fund for your children? Researchers have found that the average cost for a four year degree is between $21,000 and $47,000. If you have two children this can cost almost $100,000. You can use your life insurance policy to help pay for one of the most important steps in your child’s education.
The average funeral costs anywhere from $5,000 to $20,000. A 2020 study found that the average household does not have enough money to cover a random $400 expense. Can you imagine having to cover a $5,000 expense? Funeral expenses can end up placing an undue financial burden on families, and even end up becoming a debt that they have to pay off for years to come. A quick search on GoFundMe can show you how many families often struggle with this expense.
The Best Way to Calculate How Much Life Insurance You Need
Even though you may have thoroughly examined each of the factors above, the best way to figure out how much life insurance coverage your unique situation requires is to work with a professional.
At Metcalf Financial, our life insurance experts work with over 80 A/A+ rated carriers with dozens of different products to meet your needs. They can help guide you to the right coverage amount at the best price in the industry!
We can also help you plan for your life insurance needs as life continues to evolve.
Fill out our instant quoting tool to see your rates immediately!?
Or give us a call at (928) 514-6150