How much life insurance do you need? Consider these things.
How much life insurance do you need? Sure, this may not be the most burning question you have when you graduate from college, start a family, buy a house or land a job, it’s definitely something you shouldn’t ignore. After all, life insurance is essential if you want to keep your family financially protected.
And while life insurance may not be your number one household budgeting priority, if you have a family that depends on your income, how much life insurance you choose can be the difference between your loved ones remaining financially secure and being forced into unwanted lifestyle changes.
Seems obvious, right? But here’s the thing: Of those who believe their families are sufficiently protected with life insurance, only around a quarter have actually run the numbers to make sure.1 And 1/3 of people who have life insurance believe they probably don’t have enough.2 What we want to do is help you get on the right side of those statistics.
Well then, how much life insurance do I need, you ask? As you might imagine, there’s no one-size-fits-all answer to this question. It all depends on your current circumstances and who you’re supporting. At the end of the day though, answering the question is pretty straightforward. You don’t want to pay for life insurance that you won’t need, and you definitely don’t want to carry too little protection and put your family’s lifestyle at risk.
Below are a few steps that can help you figure out just how much is right for you. And after reading this, you may want to use the SBLI Life Insurance Coverage Calculator to estimate your life insurance coverage needs.
Decide who you’re protecting
The first thing you need to consider when estimating how much life insurance you need, are the people who depend on you for financial security. For example, if you have kids, they rely on you for pretty much everything. That’s why most of the household budget goes to keeping a roof over their heads and caring for all their other needs, wants, and general happiness. If your life insurance policy factors all of your dependents’ current and future needs, then you’ve done a great job of taking care of much of what matters most.
You may, however, have other dependents you wish to protect. According to Pew Research Center, 64 million Americans are living in multigenerational households. If this is your situation, you may also want to consider expenses related to elderly parents or other children you’re supporting today. Don’t make the mistake of leaving these current costs—or even more importantly, future expected costs—out when considering how much life insurance you need.
Start with your salary
For a working parent, this one is pretty straightforward: How much do you make per year in salary? Remember to only include your salary as opposed to your entire household income. This is important because you’re trying to figure out your life insurance coverage need as opposed to the need for you and your spouse or partner combined (in which case, your spouse or partner should do the same calculation for him/herself).
Keep this in mind: The most common source of post-death income is Social Security survivors’ benefits. Generally speaking, you can anticipate receiving up to $2,250 per month and you can subtract this amount from your coverage gap.
And while protecting your income is definitely key to providing your family with a secure financial future, the really big mistake many people make here is not even considering life insurance if they don’t have earnings from a job.
Consider for a moment what it would cost each month to pay for everything your stay-at-home spouse or parent does…nanny, housekeeper, cook, driver, tutor, bookkeeper, and more. A study by Salary.com concluded3 that it would cost $162,581 per year to make up for the loss of a “stay at home parent.”
The bottom line: If you really want to ensure your family’s lifestyle and financial future is safe, be sure to consider life insurance that covers all of your family’s needs—from all household contributors.
Paying down the mortgage and other debt
If yours is like most families, your home represents the single biggest expense in your financial life. In the event of the unexpected, many financial advisors recommend including the cost of paying down the mortgage and potentially other debt when calculating how much life insurance you need. So, if you currently have a mortgage of $250,000, this amount should be added to your life insurance coverage. Similarly, covering all your other immediate debt is essential because it is what puts the most financial stress on families.
Don’t forget your kids’ education
Another major expense to cover is college. Much like home prices, the cost of college isn’t about to go down. In fact, USA Today recently reported the annual increase in tuition costs far surpasses the rate of inflation. Sure, student loans help make college possible, but they have to be paid back with interest. If you’re helping your dependents pay for college—or you’re assuming the expense on your own—add at least $80,000 in coverage for each child.
Many families today may also choose to budget for private elementary, middle school, or high school as well. Be sure to factor in the plans you’ve made for your child/children’s overall education.
Decide if your spouse needs help in retirement
Most financial advisors will tell you, knowing how much life insurance you need, both before and after you exit the workforce, is a core component of sound financial planning. The real question here is, do you want to help contribute to and protect your spouse’s income in retirement?
Social security, pensions (if you’re lucky enough to have one), investments and other assets will all fit into the plan you and your spouse make, based on how you envision living out your retirement together. But be sure to ask yourself what happens if you aren’t in the picture. How will that impact the plans you’ve made together? The answer to that question often makes an excellent case for including some additional life insurance coverage to protect your spouse or partner’s income in retirement.
Subtract your savings and investments and existing life insurance policies
After calculating how much you need to replace your income, pay down debt, etc., don’t forget to subtract your savings and investments from your life insurance coverage needs. Why? Because this is real money your family will be able to use to cover financial obligations. For example, if you calculated your family will need $700,000 in coverage, and you have $150,000 in savings, your real coverage need would be $550,000. And if you already have a life insurance policy, you can subtract this too. Just be careful about including policies you get through work, since they may not travel with you if you change jobs or retire.
Rate of inflation
Finally, the last factor to consider is inflation. Your parents or grandparents will be the first to tell you that the cost of a loaf of bread, milk or movie tickets isn’t what it used to be. Virtually everything is more expensive. This cost trend is largely influenced by the rate of inflation, which is the increase in prices that follows the value of money. Inflationary pressures vary according to the economy and productivity. Speak to a financial advisor or a reliable financial management resource to get a better read on inflation. If you’re good with numbers, check out the Consumer Price Index. InflationData.com has a nifty inflation rate calculator you can use too.
Try the SBLI Life Insurance Coverage Calculator to quickly and easily get an idea of your life insurance coverage needs.
1SBLI Self-Awareness Quiz 2018 2http://www.limra.com/uploadedFiles/limra.com/LIMRA_Root/Posts/PR/LIAM/PDF/Facts-of-Life_2017.pdf 3https://www.salary.com/articles/stay-at-home-mom