Life insurance requirements vary from person to person depending on their individual circumstances. What ultimately matters, though, is how much money your dependents would need to remain financially stable if you were to die prematurely.
You may want to consider a few questions like these, however, before purchasing a life insurance policy.
- Who do I want to protect financially? Typically, this would be a spouse or children. But, you could also name siblings or aging parents as beneficiaries.
- If they needed financial support, how long would that last? You should take into account the ages of all the people who depend on your income.
- Is anyone disabled or in need of special care? People with disabilities often require support or assistance throughout their entire lives.
- What is the amount of debt I owe? In case you have outstanding loans, such as a car loan, credit card debt, or a mortgage, you’ll need more insurance.
- How much money do I have saved? Make sure you take into account all of your savings and investments. And, take note of how liquid they are. Real estate, as an example, cannot be sold instantly if you need cash immediately.
- Will you be contributing to the college education of your children? If the answer is yes, your coverage should be increased accordingly.
- Are you going to need to help your spouse or partner fund their retirement? Having a fully funded retirement will require more coverage than if he or she were funding it themselves.
After answering the questions above you decide to buy life insurance, the next step is determining how much coverage you need — which was discussed in the previous section. In this next part, we’ll take a closer look at how to calculate how much life insurance you actually need.
How to Manually Calculate How Much Life Insurance You Need
A simple calculation to figure out the amount of coverage you need is based on your financial obligations minus liquid assets. This method is so simple that it only involves two steps.
Step 1: Calculate your financial obligations by adding up the following:
- Your annual salary that’s also multiplied by how many years you want to have this income to be replaced.
- The amount owed on your mortgage.
- Other debts you may owe, such as student loans or credit cards.
- College tuition or funeral expenses.
- If applicable, the cost of replacing family services such as child care provided by stay-at-home parents.
Step 2: Subtract liquid assets, including savings accounts, college funds, and existing life insurance policies, from the total you found in the first step.
The amount of life insurance you need will be determined by that number.
Other Ways to Estimate How Much Life Insurance You Need
In order to get an idea of your insurance needs, you can get a ballpark figure using the techniques below. While these methods are much better than making a random guess, they often fail to take into consideration all aspects of your finances. Still, they can be a great starting point.
Multiply your income by 10.
It’s common for people to cite “10 times income” guidelines online. But they fail to take into account your family’s actual needs, savings, and life insurance coverage. This plan does not give coverage amounts to stay-at-home parents, who even without an income are still eligible.
When a stay-at-home parent dies, the value of their work must be replaced. If stay-at-home parent provided their children with free child care, the surviving parent would now have to pay for childcare.
Buy 10 times your income, plus $100,000 per child for college expenses.
By including additional education coverage into the “ten-times-income” rule, this formula extends the coverage above and beyond the usual multiply your income by 10 strategies. When you have children, your life insurance calculation often includes college and education expenses. The problem is that this method fails to take a thorough look at all your family’s needs, assets, or if you already have a life insurance policy.
Use the DIME formula.
As opposed to the other two, this formula encourages you to examine your finances more thoroughly. This is possible by including your specific debt, income, mortgage, and education to get a more accurate estimate.
- Debt and final expenses. Calculate your debts aside from your mortgage, along with the estimated funeral expenses.
- Income. Multiply your annual income by the number of years your family would require financial support.
- Mortgage. Calculate your mortgage repayment amount.
- Education. Calculate the costs of your children’s education and college costs.
Your needs are better understood after you add all of these obligations together.
The formula, while more comprehensive, doesn’t take into account any life insurance coverage and other savings you already possess. Also, it does not take into account the unpaid contributions that stay-at-home parents make.
Tips for Calculating How Much Life Insurance You Need
If you’re calculating your insurance needs, remember these tips:
- Consider life insurance as part of your entire financial plan. Ideally, your investment plan should include future expenses, such as college tuition and assets that will increase in value in the future.
- Don’t cut corners. Don’t be surprised if your income and expenses rise over time. At the same time, there’s no guarantee that your spouse and children’s income will increase in the future. But a cushion will ensure that they can continue to live comfortably.
- Have a family discussion about the numbers. Would the family be able to live without you? How much money would they need? Is their estimate reasonable? Do you need your entire income replaced or just some of it?
- To make sure you’re covered as your needs fluctuate, consider buying multiple small life insurance policies instead of one big one. It’s possible, for example, to find a policy that provides coverage for you and your spouse for 30 years until retirement, and for your children for 20 years until they graduate from college.
Most importantly? Always calculate your insurance costs by comparing quotes.
How to Use the Life Insurance Cost Calculator
A life insurance calculator is perhaps the easiest way to determine how much coverage you would need to replace your current salary and any debts you carry. Life insurance calculators are also easily accessible online and often free to use.
If you’ve never used such a tool, here are some pointers to get you started.
Step 1: Submit your age.
It is common for premiums to increase by approximately 8% to 10% with every year of age. Generally, the younger you are, the lower your premiums, which is why it is usually better to buy early. By doing so, you can lock in lower rates for the future.
Step 2: Indicate your gender.
Since women live longer than men, coverage is usually more affordable for women.
Step 3: Enter your zip code.
According to your state’s laws and regulations, the policies that you can buy depending on where you live.
Step 4: Pick a term length.
You decide how long you want your life insurance coverage to last by choosing the term length. Choosing a mortgage term equal to or greater than your longest financial obligation will prevent your loved ones from being liable for those expenses.
Step 5: Decide how much coverage you want.
Again, it’s usually recommended to buy coverage equal to 10-15 times your income. Getting enough coverage should be your priority even if you’re temporarily unemployed.
You’ll get an estimate of your policy costs after completing these steps. Then, after reviewing your options, you can begin comparing quotes from life insurance companies.
Step 6: Determine what kind of policy you want.
When it comes to life insurance, you can select between term and permanent (whole) life. As a refresher, term life insurance is usually less expensive and provides coverage for a specific period of time. Permanent life insurance costs more but lasts your entire life while accumulating a cash value.
Life Insurance Calculators
Next, you can use a life insurance calculator to help determine how much coverage you need. If you recall, to calculate your specific life insurance requirements, you must;
- Add up all of your post-tax income and liquid assets, like investments and retirement benefits.
- Add up your debts and financial responsibilities.
- Subtract your assets from your debts and financial obligations.
What’s more life insurance calculators can be used to guide in you selecting the right type of life insurance policy or what the return will be on cash value policies. With that in mind, here are 10 life insurance calculators worth using.
Torn between a term and permanent life insurance policy? Bankrate has a helpful handy calculator that you can use to determine the right type of life insurance for you by simply answering;
- Do you have an IRA or 401(k) that you are actively funding?
- How would you describe your monthly budget?
- When you have money left over after paying the monthly bills, what are you most likely to do with it?
- How would you describe your investing personality?
- How do you feel about insurance that can become self-funding in the future, meaning the investment returns are more than sufficient to pay the annual premiums?
Not sure how much life insurance you need? Using Aflec’s quick 8-question assessment, you can get an idea of the type of coverage you need to provide for your loved ones, while also protecting your assets and meeting your financial goals.
For your convenience, this tool already has pre-populated some averages. Simply adjust the numbers to match your circumstances if they are different.
Fidelity offers two tools to aid you in deciding how much life insurance you may need and how much it might cost.
- Term life insurance quote tool. Obtain a quote based on the amount of coverage you may need to replace your income.
- Financial health assessment. With an individualized analysis of your financial plan, you can determine where you are well prepared and where some adjustments may be required.
In addition to protecting your family financially, term life insurance is not expensive. Calculate how much term life insurance you may need in under five minutes with this free online tool from Ramsey Solutions.
Would you like to know how much life insurance you need? Input your current assets, income, and expenses using this calculator from 360 Degrees of Financial Literacy. Also, you can adjust your expected rate of return and inflation rate to see how these variables affect your insurance requirements. You can even get an overview of the future income and expenses of your family by clicking the “View Report” link.
Nationwide has several different life insurance calculators to help you figure out which type of insurance to buy and how much. Using this tool, however, you can get an estimate for Term Life insurance based on how much coverage you want, what length of time you’re looking for, and your health and lifestyle.
This life insurance calculator from Edward Jones covers the basics, like what liabilities you have and what income you would like to replace. But, it also asks you to input additional information that you may overlook, like your family’s education needs, what you expect your final expenses to be, and inflation so that you can buy just the right amount of coverage.
You can find out how much your universal life insurance policy will return with this calculator from Allstate. You can expect a return on your policy based on the amount, the investment performance, the policy premiums, and the tax rates of your life insurance company. A universal life insurance policy pays a benefit to a beneficiary in the event of your death, and the coverage lasts as long you continue to pay premiums. Premiums are based on the age and health of the policyholder.
If you purchasing life insurance to help cover your children’s education, then you might want to use this handy tool from Charles Schwab. By using the College Savings Calculator, you can get an estimate of how much you should save since it asks questions about your student’s potential college plans and your savings goals.
While this is an area that most of us avoid, understandably, death is also inevitable. This calculator from Great Western Insurance Company allows you to estimate your final expenses, as well as show how those expenses may change as time goes by. Using the data will help you decide whether a Final Expense or Preneed Funeral policy is a good fit for you.
Life Insurance Calculator FAQ
How is the price of life insurance calculated?
The amount of coverage you buy will be impacted by several factors. Mainly, these considerations are your age, health, lifestyle, and the length of the policy.
What is the proper length of life insurance coverage?
If you have dependents relying on your income, then your coverage should last at least as long as your longest debt. So, for example, if you have a 30-year mortgage, then you should purchase a policy for that amount of time if you don’t want to burden your family with this debt.
In what ways does the life insurer I choose affect my calculated cost?
As each life insurance provider assesses your risk in a different way, choose a company that has the most affordable premiums after verifying its financial stability and trustworthiness.
What is the average amount of life insurance?
That depends.
Life insurance costs on average $26 a month. This is based on Quotacy data for a 40-year-old who is buying a 20-year term life policy, which happens to be the most common term length, notes Georgia Rose for NerdWallet. However, life insurance rates can vary dramatically between applicants, insurers, and types of policies.
“We’ve found that the average cost of life insurance is about $126 per month, based on a term life insurance policy lasting 20 years and providing a death benefit of $500,000,” Sterling Price states for ValuePenguin. “You should think of this number strictly as a baseline – your own rates for life insurance will change depending on your age, the insurer you choose and the amount of coverage that you find is right for your family.”
