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How much life insurance do I need?

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If you have dependents, life insurance can provide valuable peace of mind in the event of your death. A life insurance policy that will provide for various expenses following your death can help ensure that your family or loved ones are not left unnecessarily burdened.

Researching and purchasing the right policy for you can be complex, and there are a number of important questions to consider. The most fundamental question is, “how much life insurance do I need?” Let’s take a look at how you can figure out the answer.

What is life insurance?

Life insurance is essentially a contract between you and your insurer. Your premiums ensure a payment called a death benefit will be given to a person or persons you designated as beneficiaries in the event of your passing.

There are two primary types of life insurance. Term policies are simple, relatively inexpensive and serve only to provide the death benefit at the end of your life, should that event take place within the term of the policy. Whole life (permanent) policies have an added component: a portion of your premium is invested, with earnings made available to you after a specific period. Whole life policies also have no termination date; they continue to be active as long as you pay the premiums.

Who Needs Life Insurance?

Life insurance is obtained to benefit those who may be left with financial challenges after you die. Because of that, most life insurance policies are purchased after a significant life event, such as marriage or the birth of a baby. The policy is intended to help your loved ones to remain financially secure without your salary. 

Occasionally, there are other reasons to purchase life insurance. If you co-own a building with someone, for example, a life insurance policy can prevent either of you being left accountable for joint mortgage payments or other costs. You might also buy a policy in order to leave behind financial support to a favored charity.

Age and life insurance

Although some people may not consider life insurance necessary when you’re young, there are benefits to getting a policy earlier in life. For starters, few insurance companies will turn you away because of your age if you are younger and healthier.


Your insurance rate is determined partly by your age. Insurance carriers bank on a lower chance of your death if you are young — which means there is a lesser chance they will have to pay out a death benefit. Because of this, your premium costs will typically be lower if you are younger when you purchase your policy.

If you want a life insurance policy when you’re older, on the other hand, there is a higher likelihood that you might pass away when the policy is in effect. To counter that, your insurer charges a higher premium. By shopping around however, you can still find reasonably priced policies when you’re in your 50s or even 60s, particularly if you’re in relatively good health.


The primary consideration regarding your qualification for life insurance is your health. One of the requirements of many life insurance applications is a health exam. How well you score on the exam impacts whether or not you can secure a lower premium.

An older person is more likely to be dealing with chronic or serious health conditions, which often merits a higher rate. Other qualification factors include whether or not you are a smoker and if your occupation or hobbies are high-risk.

Cash Value vs. Term Life

Term life insurance is the simplest form of life insurance. Many financial advisers recommend term policies because they are more affordable than whole life, cash value policies, and only cover you during years when you have dependents at home and the need for financial security is highest.

Whole life cash value policies have the added benefit of serving as a sort of forced savings plan for you, since part of your premiums are deposited in a tax-deferred interest-bearing account. However, the interest you earn is rarely as high as what you’d get by investing the money yourself. It’s also important to consider the long-term goals with your life insurance if you are going to be paying for a policy later in life when you no longer have dependents.

How much life insurance do I need?

Let’s say you’ve decided on a 20 year term policy. Now that you’ve decided on a policy type, the big question is how much term life insurance to get. The actual amount will depend on numerous — sometimes complex factors, but we’ll keep it simple in this article for estimation purposes. 

Step one: debt

Tally all your outstanding debt. Include car loans, student loans, and your mortgage, credit card debt and any other loans you might have.

Add in an additional estimate for funeral expenses. According to the National Funeral Directors Association, the average cost of a funeral in 2019 was $9,135.

Step two: education

If you have children, or if your spouse or partner is still in school, you may need to consider education costs. These can be significant, especially if your children attend a private school, or for higher education expenses in general.

In fact, when it comes to estimating the cost of college, the National Center for Education Statistics indicates that you’ll need roughly $18K for each year at a public college or university, and more than $42K for a private education. If you’re like most people, you don’t have that much money in savings, but a good life insurance policy could relieve your children of some of the costs of college.

Step three: income

Your family may currently depend on your income, and with your passing, this would be compromised. Your life insurance policy should go a long way toward making that up, especially for the years when your children are young and living at home.

Ideally, you should factor in the salary you make, multiplying it by the number of years your family would depend on having it. Take into consideration the increasing costs of living over time as well. Financial advisors generally suggest that you multiply your salary by 10, as a minimum.

Step four: other assets

Your salary may not be your only asset. If you’ve built up significant equity in your home, that can be something your family can leverage if you were to die unexpectedly. Perhaps you’ve got stock holdings, a mutual fund, or other financial resources.

If that’s the case, you may already be working with a financial advisor. He or she can help you determine a total so that you have a good understanding of your net worth and how it affects your life insurance budget.

Step five: run the numbers

Combine all the estimated projections for outstanding debts, future expenses and cost of living totals to determine the minimum value your life insurance policy should be. Then factor in your current net worth. The final number is roughly the amount of life insurance you need to purchase to provide for your family should you pass before your policy term is reached.

Alternatives to life insurance

If a life insurance policy feels like too much for you, there are a couple other things to consider. Ask your human resources manager if your company offers any sort of term insurance. Often companies will offer group life insurance valued at one or two times your annual salary as part of the benefits package, at no cost to you. 

Also check with your credit card company, especially if you carry a balance forward each month, to see if they have a rider you can add to your account (typically costing only a few dollars a month) that will pay off your balance if you pass away.

Finally, even if you have no dependents to protect financially, there are still your funeral costs to consider when you die. A simple burial policy can be purchased from companies that specialize in this type of policy; in some states, funeral homes may even offer this. At a minimum cost, this provides coverage for unexpected funeral costs.

The takeaway: Figuring out how much life insurance you need is a matter of running your financial numbers

  • Life insurance provides financially for the loved ones who depend on you.
  • Of the two types of life insurance — whole life and term — the latter is a better choice for most people.
  • Determining the amount of life insurance you need requires you to know your debts, assets and other financial data.

Life insurance can provide you with the peace of mind in knowing that those you care about won’t face financial difficulties if you die. A simple term policy, especially one that covers the years your children are young and living at home, can ensure that they are cared for and able to afford an education. 

Determining the amount of life insurance you need involves a few simple calculations, and a financial advisor can be a great help when you’re ready to purchase a policy to ensure you obtain adequately coverage.

Mary Van Keuren

After 30 years as a writer and editor in academia, Mary now writes full-time for the insurance and finance industries. Her work has appeared on Reviews.com, TheSimpleDollar.com and Bankrate.com, as well as other consumer-focused websites.

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