Financial Resource Center


Life Insurance: How Much is Enough?

by Dianne Molvig / March 26th, 2021

Who isn't looking for ways to scrimp and save these days? When you're faced with meeting expenses in the here and now, it's tempting to put off paying for seemingly remote needs, such as life insurance. "People think, 'I'm healthy. I'm careful. Nothing is going to happen to me,' " says Mark Zaifman, a Petaluma, Calif., financial planner. "We have all these rationalizations and talk ourselves into believing we don't need life insurance." Indeed, 46% of U.S. adults had no life insurance as of 2021, according to Policygenius, an online insurance marketplace. 

For some adults, of course, life insurance isn't a necessity. "But if you have anybody dependent on your income, you absolutely can't afford to go without it," says Kathy Stearns, a financial planner in Boise, Idaho. "It's a critical piece of any financial plan." Not having any life insurance is one peril. Another, perhaps even more common, is owning a policy but having insufficient coverage, says Lea Ann Knight, a financial planner in Santa Fe, New Mexico. People who have a group policy at work, for instance, often figure they've taken care of life insurance. "They don't realize that's not enough," Knight says. "If you die and all your spouse gets is one year of your salary, that's not going to cover much."

Figuring your coverage

So what is the right amount of coverage? Sometimes you'll hear rules of thumb, such as buying coverage equal to eight to 10 times your annual salary. But financial experts agree such formulas are of little use. Two people with the same salary may have vastly different life insurance requirements.

To get a better idea of what you should buy, consider your survivors' short- and long-term financial needs, including:

  • Final expenses—Enter into your calculation the amount needed to pay for your burial or cremation expenses.
  • Major debts—Add in debts you'll leave behind, such as a home mortgage, college loans, car loans, and significant credit card balances. Include any outstanding debts that would be a heavy burden on your survivors.
  • Your children's college expenses—Decide how much of this you want to cover with life insurance. A portion? All of it? This is a less critical piece since there are many ways for your survivors to pay for college.
  • Income replacement—Once you've covered all those categories, calculate what your survivors will need to cover the rest of their ongoing expenses. A major one to include is health insurance. If you're the one who has coverage through your job, your family will have to buy other coverage after you're gone. 

After you add up all the categories, subtract any sizable assets. Perhaps, for instance, you've already built a hefty retirement account your survivors would inherit. That would diminish how much life insurance you should buy. A financial planner can help you determine the right amount of coverage to buy. Seek advice, though, from a fee-only financial planner, one who provides advice for a fee, but does not sell financial products—such as life insurance.

It's personal

Your personal goals also enter into your insurance-buying decision. "Some people may want enough coverage to help their spouse get back on his or her feet after a couple of years," Zaifman says. "Some want the surviving spouse to never have to work. Those are personal decisions that require thought, careful analysis, and deep soul-searching."

You may be surprised at the number once you figure how much coverage you actually need. Still, life insurance is a good buy. If you're young and healthy, you can buy term life insurance for a few hundred dollars a year. But if the premium is still out of reach, buy what you can afford now. You can purchase more coverage when you're able. Remember, though, the older you get, the higher the premium you'll pay. 

Needs will change

Once you decide how much life insurance to buy, you're not finished. You'll need to rethink your coverage at certain key life transitions: marriage, divorce, birth of a child, buying a bigger house and taking on a bigger mortgage, children setting out on their own, paying off your mortgage, and so on. But the moment to examine your life insurance needs for the first time is now. 

Sure, thinking about your demise is unnerving, and buying insurance feels like a hassle, but buying life insurance should come before you start investing or saving for retirement. If you don't have enough coverage, those goals may never be reached if something happens to you.


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