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Life insurance is one of the most important kinds of coverage you can buy, though it’s a type of insurance you hope you’ll never need.

Life insurance can protect your family from financial catastrophe in case you die while your loved ones are still relying on you.

“Life insurance is intended to protect against the loss of income,” Alex Caswell, a Certified Financial Planner® and wealth planner at RHS Financial, tells LendEDU. “You’ll need to decide how much you need and for how long.”

However, it can be difficult to determine exactly how much coverage you require, especially since there are different types of life insurance — including whole life insurance, term life insurance, cash value life insurance, and universal life insurance, for starters. It’s also a challenge because coverage needs differ based on the individual’s unique situation.

If you find yourself wondering “How much life insurance do I need?” this guide will provide insight into some rules of thumb used to determine life insurance needs. It will also explain how to calculate your own coverage amounts.

How much life insurance should I have?

There are a variety of answers to this question. Unfortunately, some of the “rules” don’t always make a whole lot of sense.

For example, many financial advisors recommend you buy a policy that provides coverage for up to 10 times your annual salary. But this advice is too simplistic because it fails to consider your unique needs or how much money you already have saved. If you have millions in the bank, you may not need a life insurance policy at all — but if you have disabled children who need costly care for life, 10 times your salary may not be enough.

Instead, you need to consider how much of your annual income you actually need to replace.

“Calculate your annual expenses and any future expenses that you may need to cover,” Caswell advises. “And calculate how long you will need to protect this income. This could be for the duration that your children are being supported by you or for the duration of your mortgage payments.”

Once you’ve figured out your long-term financial needs, you can subtract any assets you already own that could help fulfill those obligations. This will give you the amount of coverage you need. Here’s how you can arrive at this number.

How to calculate how much life insurance you need

  • Add up your outstanding debts on a piece of paper or spreadsheet. This should include your credit card debt, mortgage balance, student loan debt, car loans, and other money you owe. You don’t want your loved ones to be stuck with this debt in your absence, so this should be the baseline for your coverage.
  • Multiply your annual salary by the number of years your loved ones will need this income if you pass away. At a minimum, you’ll want to make sure you give your family at least a few years of your income after your death to adjust and get back on their feet. But you may want to replace your salary for a longer period of time. For example, your family might have to rely on your salary until your kids graduate from college. This is an important step even if your spouse works, since they may not be able to continue earning a salary in your absence if you have children who need care.
  • Add in future financial obligations you want to fulfill. This could include the costs of paying for your child’s college education. Since funerals tend to be very expensive, with an average price of $7,000 to $9,000, you should also add in enough money to cover those final expenses.
  • Tally all of these obligations and subtract whatever amount you have currently saved in liquid assets or other accounts. This amount is equal to the total cost of life insurance you should aim for.

Other factors to consider when buying life insurance

If you go through the process outlined above, you should get a fairly good idea of the amount of life insurance coverage you need. However, there are always personal variables that may cause you to change your policy amount. Here are other factors you should consider to ensure your family is fully protected if something goes wrong.

Health concerns: If you or a loved one has a history of poor health, this could impact the amount of life insurance you want to buy. If you’re sick, you may anticipate something happening to you sooner than it otherwise would, so you may need coverage for additional years.

If a loved one has chronic health issues, you may want to make sure money is available to pay their bills and provide for their ongoing care if something happens to you and you aren’t there to help.

Your anticipated financial future: Do you expect your expenses to increase significantly over time? If you think costs will go up — perhaps because you have a small family now but want more kids in the future — it may make sense to take out more life insurance coverage. On the other hand, if you’re on track to pay off major debt soon and you think your expenses will actually decrease, you may not need to buy as much coverage.

It’s always best to err on the side of caution and provide an extra cushion for your loved ones when you decide on the coverage you need. If you get several quotes from the best term life insurance companies, you should be able to find affordable rates that provide you with the security you need in the future.

Who doesn’t need life insurance?

Anyone who has family members who depend on them needs a life insurance policy. However, there are circumstances when coverage may not be necessary.

One example is a recent graduate with no children and no other debt obligations their family would be responsible for. Of course, if they think they will eventually get married or have kids, it can make sense to buy a policy while they’re still young and healthy before any issues crop up that would make securing coverage more difficult.

An older couple with a paid-off house, adult children who are independent, and solid Social Security and retirement savings may not need life insurance at all. In this situation, if the couple’s assets are substantial enough to easily support a surviving spouse when one spouse passes away, the couple is self-insured and does not really need coverage.

If you have a life insurance plan through your employer that provides you with sufficient coverage, you may also not need to buy a separate policy. Be aware, though, that you could lose this coverage if you change jobs, and you may not be able to get an affordable policy if you’re older or sick when you lose coverage.

The bottom line

Figuring out how much life insurance is right for you is important. Do the necessary calculations today so you can buy a policy that provides the future protection your loved ones deserve.

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