There is no single method to precisely determine the amount of life insurance you need – down to the cent.
However, this article will show you the following:
- How to determine if you need life insurance
- How to calculate your life insurance number
- How to estimate the cost of your life insurance
- How to determine the best type of life insurance
After you complete this article, you will be able to determine whether you have a life insurance gap and if so, how much you need to fill.
In this article
Before you dive into this article, know that Policygenius can help match you with the best life insurance carrier for your situation.
Although we don’t have a crystal ball to determine when our time is up, we can take proactive measures to buy life insurance and financially protect our families today.
How to Calculate How Much Life Insurance you Need
The calculation I’m about to show you will help you determine the life insurance amount you need.
Keep in mind that there are many factors that go into the calculation of how much life insurance you need, including:
- Total debt
- Work status
- Marital status
The general formula that you can use to drill down to your life insurance number is the one I used for myself and my husband, below.
I would recommend you take 1 to 2 hours during a weekend to sit down (preferably with your partner, if you have one) to determine your life insurance needs.
Below are some stats for Policygenius:
- Limited sales calls
- Live customer service support
- Competitive life insurance quotes
- Policygenius reps don’t work on commission, so they won’t upsell you
- It’s a life insurance marketplace to match you with the best life insurance company
What I like about Policygenius is that the company is like a matchmaker, where they match the best life insurance companies to your personal situation.
If you need $50,000 (including taxes) per year to live on, here’s an example of how your life insurance calculations could go:
|Life Insurance Calculation Input||Description|
Annual Income Need
$50,000 per year (including taxes)
Estimated Investment Return
Required life insurance to pay for income need
To replace your required annual income (to pay for your basic living expenses), think about how much income you could generate if you were to invest all of the life insurance proceeds.
With a $1,250,000 life insurance policy payout, you could invest the $1.25 million and can generate roughly 4% of income, which would equal your $50,000 annual need.
The key here is this:
- You can’t “splurge” the life insurance money
- You’ll likely have to find a professional investment manager
- You’ll likely have to find additional income streams for future expenses
Ultimately, you’ll have to be OK with the investment returns that the life insurance proceeds generate for you to continue your basic-needs lifestyle.
If you don’t have life insurance yet and you have children and/or a partner that depend on you, it is SO important to start thinking – and applying to – life insurance ASAP.
Let me tell you a quick story.
|True Case Study|
Bread-winner, income = $250,000
Number of kids
Age of kids
- Age 10
Current liquid savings
Years until retirement
Life insurance coverage
As you can see, they had a major exposure because they both had $0 in life insurance.
After coming to me with some financial planning questions, I helped them understand that they needed life insurance ASAP.
Both husband and wife started filling out (but put off completing) the life insurance application process (they signed up for level term life insurance)…until the wife had a life-altering stroke during the application process.
Because she had the stroke, she was no longer insurable, which means the wife wouldn’t pass the life insurance medical exam… which means she no longer was eligible for life insurance.
And although she did live, the wife could no longer apply for life insurance and protect her family, due to the severity of the stroke.
Life Insurance Rules of Thumb
Although we cannot determine the exact amount of life insurance you will need, I can give you a few life insurance rules of thumb to better estimate how much life insurance you should expect to buy.
Let’s break down what these life insurance rules of thumb actually mean, below.
Rule of Thumb #1: Buy Life Insurance Coverage 10x to 12x your Annual Income
Let me be honest with you and say that this rule of thumb could be considered old-fashioned and possibly even outdated.
That’s because simply looking at your income today and multiplying it by 10 to 12 times doesn’t take several factors into account, such as:
- Whether your income will grow
- Whether you already have life insurance
- Whether you will take on more debt in the future
- Whether you will have kids who will attend college
- Whether you currently have a spouse depending on you for money
If there’s something I learned in life, it’s that the only constant is change.
So, if you are a young professional who is just starting out in your career and have a lot of growth potential (income-wise), then multiplying your current income by 10 to 12 times may not give you an accurate life insurance number.
Bottom Line: Take these life insurance rules of thumb with a grain of salt.
Rule of Thumb #2: Buy Level Term Life Insurance that Lasts Until your Retirement
Don’t fall for those tricky life insurance salespeople who want to sell you permanent life insurance coverage (and a type of permanent insurance is known as whole life insurance).
Whole life insurance:
- Lasts for your life
- Is very expensive
- Doesn’t give you a bang for your buck
And seriously, who wants to spend $8,000+ per year on life insurance?
Instead of buying permanent life insurance, you’ll want to consider buying what is known as level term life insurance with online insurance providers like Policygenius.
To explain “level term life insurance” in plain English, check out my “translation kit” below:
The cost and the death benefit of your life insurance will be locked-in for your term... aka the cost won't increase and your death benefit won't decrease over time.
The life insurance will only cover your life for a certain period (such as a term of 5 years, 10 years, 15 years, etc.).
Insurance that pays your beneficiary a death benefit, which is tax-free, when you pass away.
Now that you have a rough idea of what level term life insurance is, next I want to explain why you should buy level term life insurance until your retirement.
Why you should buy life insurance until retirement only:
- After retirement, you won’t have a spouse depending on you for income
- After retirement, you likely will not have a mortgage or other major debts
- After retirement, you likely will have kids who won’t depend on you for income
- After retirement, you will likely have enough saved for yourself and your spouse
That being said, it might be important to note that you may need to keep your level term life insurance past retirement if you:
- Still have debts (like a mortgage)
- Want to leave a lasting legacy to your heirs
- Are significantly older than your spouse and want to leave them with some assets
Determining how much life insurance you need really depends on your personal situation.
However, typically speaking, you generally only need life insurance to last until your retirement (whenever that is), in an effort to avoid paying the insurance company extra.
Here’s why I don’t like insuring past retirement:
- You’ll likely be over-insured
- You’re likely paying the insurance company more money
- You could have been investing in the stock market instead of paying the life insurance company
So although you want to make sure you have enough life insurance, you also don’t want to be over-insured to a point where you’re simply spending too much money on life insurance that you don’t need.
Keep in mind that a fine balance is key.
Rule of Thumb #3: Buy Life Insurance 10x to 12x your Annual Income Plus $100,000 Per Child Under 18
Everyone knows that kids can be a major expense – especially if you are planning to help them pay for college.
As we all know, the cost of the American college tuition has been skyrocketing over the past few years.
Take a look at this graph below, indicating the average tuition growth for national universities from 2001 to 2021.
As you can see, the data above point toward a trend of rising tuition costs that do not suggest leveling off or decreasing anytime soon.
For this reason, it’s important to consider protecting your partner and children from the increasing cost of college by adding an additional $100,000 to your life insurance on top of the 10x to 12x annual salary multiplier.
Keep in mind that this rule of thumb doesn’t take the following into account:
- Your current debt levels
- Your future income growth
- Your current savings picture
- The number of kids you plan to have in the future
Again, this is simply a rule of thumb, but would certainly help cover the cost of college to some extent for your kids.
Rule of Thumb #4: Consider your Debt, Income, Mortgage and Education [aka DIME]
This is the most customized and personal rule of thumb out of the 5 life insurance rules of thumb.
You take a personalized approach when you look at your:
Although there is no such thing as a “magic number,” this approach looks at your DIME factors to determine the amount of life insurance you need so you’re not over-insured (aka paying too much).
Take a look at the factors below.
Estimate your total debts (excluding mortgage)
Estimate the number of years your family would need to live off your current income and multiply your annual income by that number
The estimated amount of mortgage left on your home(s)
The estimated cost of college for each of your kids
The final step is to add up all of the numbers together and you’ll find a more personalized life insurance number.
Keep in mind though that this still is just a rule of thumb.
The DIME approach does not consider your:
- Current savings
- Current life insurance coverage
- Current life contributions of your stay-at-home partner
However, the DIME approach likely is the most customized approach of the 5 life insurance rules of thumb.
Rule of Thumb #5: Stagger your Life Insurance for Major Life Events
Instead of simply buying 1 gigantic life insurance policy, consider buying multiple, smaller life insurance policies that are staggered through your life, based on certain life events.
Below are examples of life events:
- College for kids
- Working years until retirement
- Years until the home mortgage is paid off
Considering the timeline of these events, you can adjust the life insurance that you need to carry to reduce the amount of coverage and cost.
What does Life Insurance Cover?
The main purpose of life insurance is to cover the annual income of the breadwinner – or annual family contributions of the stay-at-home parent.
Below are some of the main items that life insurance will cover:
- Financial obligations
- Caregiving duties
- Debt obligations
- Earned income
- Children costs
- Funeral costs
- College costs
Remember that you don’t want to over-insure yourself, which means that you are paying the life insurance company more than what you need.
Although it’s always “nice” to know that you’re plenty insured, keep in mind that the true purpose of life insurance should be to cover just the bare-bone needs.
Who Needs Life Insurance?
Keep in mind that life insurance may not be for everyone – and that’s perfectly OK.
Below is a chart that can help you better decide whether you will need life insurance on yourself and/or your partner:
|When You Don’t Need Life Insurance||When You Need Life Insurance|
You are single with no kids
You have children
You don’t have anyone depending on you for income
You have a partner who depends on you for income
You have enough assets saved to take care of yourself / your family even after your death
You are the primary parent to take care of the children
You don’t have any debts
You don’t have enough assets (yet)
You have significant debts (mortgage(s), car loans, credit card debts, etc.)
You are expecting your kids to go to college
I want to stress this again that if you have a stay-at-home partner, it’s very important to insure them as well.
Think about it, without your stay-at-home partner’s help, you’ll have to pay for:
- Childcare costs
- Homecare costs
- Living care costs
Although your stay-at-home partner’s work may not be compensated through earned income, their work at the house is very valuable and thus, they should be insured adequately.
So, if you earn $300,000 annually but already have $3 million saved, you probably don’t need a $3,000,000 life insurance policy because you already have a substantial amount of assets saved.
However, even if you do want to insure yourself for $3,000,000 in life insurance, chances are your annual premiums will still be fairly low if you buy term life insurance through platforms like Policygenius.
Term life insurance is affordable, and for a $3,000,000 policy for a mid-30-year-old in good health would likely cost about $1,000 per year (that’s cheap in comparison to the $10,000+ per year you’d be spending on a whole life insurance policy for the same $3 million benefit).
Related: Term Life vs. Whole Life
What Type of Life Insurance should I get?
Life insurance is not a scam – if you choose the right kind of life insurance.
If you are:
- A healthy individual
- A young professional
- At the beginning of your career
…Then the best type of life insurance would likely be level term life insurance.
Check out some of the pros and cons of term life insurance below.
|Pros: Term Life Insurance||Cons: Term Life Insurance|
Low premiums for a high death benefit
Covers only a selected term (is not permanent)
In some cases, term life insurance can be converted into whole life insurance (which is not always recommended)
No cash value build-up
Covers only a specific term
No flexibility on premium payments
Especially effective when you are young
Applying for a new term is typically more difficult and expensive (due to an older age)
The reason why I highly recommend level term life insurance for young professionals is because most Millennials don’t have a few extra $1,000 to purchase the more expensive (and often more inefficient) option of whole life insurance.
How much does Term Life Insurance Cost?
If you buy term life insurance, you probably won’t be looking at a major annual cost.
Here’s why term life insurance doesn’t cost as much money as other forms of life insurance:
- No cash value build-up
- Does not last for your life
- Simplest type of life insurance
Ultimately, the cost of term life insurance will depend on several factors including:
- Your age
- Your health
- Your family history
- Your smoker / non-smoker status
- The amount of your death benefit
- Your lifestyle (aka are you an accountant or a sky-diver?)
Take a look at my $1,000,000 term life insurance quote with Policygenius below:
For most young professionals who are at the beginning of their careers, it might make sense to start with a $1,000,000 (or even more) term life insurance policy.
Take a look at the monthly cost below for the following terms:
Since I’m in my mid-20’s, I would probably opt for a 30 or 40 year level term policy for both myself and my husband (which would put our life insurance coverage just until we turn roughly 65, or our estimated retirement).
Remember that these numbers are specifically for my health and personal situation, so your life insurance quotes will very likely differ.
For grins and giggles, I also ran a whole life quote to show you how much more expensive whole life insurance is when compared to term life insurance.
Take a look at the cost below for a $1,000,000 whole life insurance policy.
Whole life insurance is about $662 more expensive per month for the same $1,000,000 death benefit (or $7,944 more expensive per year).
Now you know why I’m against paying so much more (literally, $1,000’s more) for whole life insurance for the same benefit that you would get for term life insurance.
Take a look at the $1,000,000 term life vs. whole life insurance price comparisons below:
It’s super easy to run a quote with Policygenius (it took me literally 3 to 4 minutes) to see how much you could be expecting to pay for your life insurance.
You could be matched with several life insurance companies, including the following:
And that’s exactly why I like Policygenius – they are a matchmaker and don’t just push 1 individual life insurance company your way.
The most common rule of thumb is purchasing life insurance that is roughly equal to 10 to 12 times your annual income. That amount of life insurance should last until your retirement.
The cost of a 500k policy depends on several factors, including your health, smoker status, gender, and the type of life insurance you buy (such as term life insurance or whole life insurance).
For a 20-year term 500k life insurance for a healthy man, you can typically expect to pay around $20 to $40 per month.
Typically speaking, 250k is not enough for young professionals who expect to earn more in their later years.
It’s my recommendation to at minimum consider insuring yourself for $500k to $1,000,000 for 30 years if you’re a young professional.
Closing Thoughts: How Much Life Insurance Do I Need?
The number 1 takeaway is to start thinking about life insurance today.
Here’s what not to do:
Sadly, we don’t know what life will throw our way, so it’s very important to protect our loved ones from a potential disaster
In my opinion, the best type of life insurance for young professionals is level term life insurance.
You can easily run quotes for your situation through platforms like Policygenius – where you won’t be upsold or forced into an uncomfortable situation by life insurance representatives.
Keep in mind that you’ll want to cover:
- Your spouse
And the younger (and healthier) you are, the lower your annual cost (aka premium) will be for your term life insurance.
The only law of life is change.
So make sure you insure yourself and your partner today, before it may potentially be too late.
Your bank accounts (and your loved ones) will thank me later.
How much life insurance do you think you will need?