How Much Life Insurance Do You Need?
Key Takeaways
- You should choose life insurance based on your finances, your family’s needs, and your health.
- Consider how much debt you will leave behind along with other costs such as funeral expenses and caring for any dependents.
- If your family relies on your income, consider a higher level of coverage.
- If you are seeking coverage for moderate end-of-life costs, then final expense insurance may be the right choice.
It Depends on Finances, Family and Current Health Status
How much life insurance you need depends on your finances, family situation, and current health status. You should choose a policy that fits how you intend your beneficiaries to use the life insurance benefit.
Many people buy life insurance policies to support their dependents for a period of time or to pay off their mortgage and other debts. However, there are also lower-cost policies that can help cover any final expenses, such as funeral arrangements and estate settlement.
Life insurance provides relief and security for the loved ones during a difficult time. Here’s how to choose the right life insurance policy for you and your beneficiaries.
Factors To Consider When Calculating Your Life Insurance
When determining the minimum amount of life insurance you’ll need to replace your income and cover your final expenses, you should account for several financial factors. Think about the assets you have, the debts you owe, and the final expenses you anticipate.
- Debts: Any outstanding loans or lines of credit are debts. These might include credit cards, mortgages, student loans, and car loans. A life insurance policy’s death benefit can help pay debts.
- Burial costs: The median cost of a funeral in the U.S. exceeds $7,800. Funerals with burials, rather than cremations, cost an average of $8,300. The death benefit can help with this expense.
- Income replacement: Life insurance may replace your income for a period after you’ve passed away, which is particularly important if you are the sole or primary provider for dependents. In that situation, experts recommend enough life insurance to replace five to 10 years of your income.
- Financial needs of your dependents: Consider any large expenses your dependents may incur in the future, such as college tuition. You may want your policy’s death benefit to help cover those costs.
- Liquid assets: Liquid assets refer to cash or assets that could be quickly converted into cash without losing significant value. Some life insurance policies have a cash value, which can be considered a liquid asset.
Secure your family’s future with Final Expense Life Insurance.
Contact GoHealth to find coverage that fits your needs.
Mon – Fri, 8 a.m. – 6 p.m. CT | TTY: 711
How To Calculate Your Life Insurance Needs
Now that you know what to factor into your life insurance policy, it’s time to calculate the right policy amount for you. Take these steps to determine how much life insurance you need.
- Assess your current finances. Evaluate your assets and your debts to estimate the potential value of your estate and the financial obligations you might leave behind. Your life insurance should provide a large enough benefit to cover any outstanding debts, including your mortgage.
- Determine what you need your life insurance to cover. Consider your financial obligations and final expenses, including funeral and burial costs. Also, think about the support your dependents will need moving forward and any major expenses your policy might cover for them, such as higher education.
- Think about income replacement. If you are the sole or primary provider for your dependents, your life insurance should replace five to 10 years of your income.
- Consider inflation. As you run your calculations, don’t forget about inflation and how it might impact your final expenses and the amount of money your dependents might require in the future.
- Regularly review your policy. Life insurance should not be a one-and-done decision. Your financial and family situations will evolve as time progresses, so you should review your policy regularly to ensure it still meets your needs.
Types of Life Insurance To Consider
Different policies may offer a wide range of benefits, premiums, and terms. Consider which of these types of life insurance would best suit your situation:
- Whole life insurance: Whole life insurance is permanent life insurance, which provides coverage for your entire life as long as you keep up with your premiums. Whole life insurance is typically costlier but may be the best option for people with large estates, large amounts of debt, or multiple dependents.
- Term life insurance: Term life insurance is more affordable than whole life insurance. Coverage lasts for a set term, and beneficiaries receive the death benefit if the insured passes away during that term. If you have dependents and a limited budget, term life insurance is a good compromise.
- Final expense life insurance: Final expense life insurance is another type of permanent life insurance, but its coverage is not as robust as other types of whole life insurance. Final expense policies specifically pay for moderate end-of-life expenses, such as funeral costs and medical bills. Older individuals and those with health complications may be good candidates for final expense insurance because it is relatively easy to qualify for.
- Employer-sponsored life insurance: Some employers offer life insurance as a benefit to their employees. Employer-provided life insurance is a type of term life insurance; if the insured passes away while employed by that company, the policy will pay out a lump-sum benefit. The benefit is usually equal to one year’s salary, making this type of life insurance a reliable, affordable option for people with no dependents or significant debt.
What Will Happen to Your Debt?
When someone passes away, their outstanding debts fall to their estate, which is overseen by the will’s executor. The executor uses the deceased person’s assets to settle any remaining financial obligations, such as credit card debt, a mortgage balance, car loans, or medical debt. If someone passes away without enough assets to fully settle their debts, their family is not responsible for paying them off — usually.
Nearly half of Americans expect to pass on debt to their family and loved ones when they die, often because they have family members or loved ones who are cosigners or joint owners on loans. Also, in nine community property states, spouses are automatically considered joint owners of most debts and assets, meaning someone in debt may pass along that debt to their spouse even if they were not a cosigner.
Of the 46% of Americans who expect to pass along debt, 21% do not have life insurance coverage. Without life insurance, most or all of an estate could end up going toward their outstanding debts. But if the deceased person had enough life insurance to settle their financial obligations, their estate can go to their loved ones instead. That’s why it’s important to know how much life insurance you need.
Putting It All Together
When determining how much life insurance you need, you should consider your debts, assets, dependents, and future goals. You should purchase enough life insurance to settle your financial obligations, pay any final expenses, and ensure your dependents have the support they need, including for future expenses such as education. Finally, you should choose the right type of life insurance — whole or term — for your family situation and lifestyle.
Secure your family’s future with Final Expense Life Insurance.
Contact GoHealth to find coverage that fits your needs.
Mon – Fri, 8 a.m. – 6 p.m. CT | TTY: 711
Sources
- 46% of Americans expect to pass on debt to their loved ones when they die. Policygenius.
- Life insurance calculator. Edward Jones.
Life Insurance: How Much Is Enough? Navy Federal Credit Union.