How Much Life Insurance Do I Need?

When you’re shopping for life insurance, it can be hard to tell how much you should buy. You don’t want to spend more than you need to. At the same time, you don’t want to buy too little protection and leave your loved ones with an unpleasant surprise.

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Some financial advisors will tell you to multiply your annual personal income by 7. Others might tell you only to buy enough life insurance to cover you during your working life, and then invest the money you save for your retirement. There are even a few who advise you to buy just enough life insurance to cover your debts.

None of this is bad advice. But before you commit to buying anything, it’s a good idea to ask yourself a few questions about your financial needs.

4 Financial Questions You Should Ask

To figure out how much life insurance you should buy, think about these 4 things:

1. What are your short-term financial needs? To figure this out, consider emergency expenses and outstanding short-term debts. Emergency expenses should include a cash reserve to cover medical emergencies or repairs to your home. Short-term debts include credit card balances and car loans.
2. What about long-term debts? This includes your mortgage, student loans, and future tuition costs. Deciding what your children may need in the way of college funds may sound tricky. But using the cost of college today as an indicator will give you some sense of how much to plan for.
3. How much will your family need to maintain their standard of living? On this list you’ll want to include necessities such as childcare, household bills, and transportation expenses. Also consider how much your family spends on non-essentials, like shopping and vacations. Once you’ve come up with a figure based on one year, multiply that by the number of years you expect to be providing for your family.
4. How much are your family’s resources worth? Put a dollar amount on your family’s resources. To do this, you’ll want to include savings, stocks, bonds, mutual funds, and Social Security benefits. This list should only include your “liquid assets” — meaning assets that can be converted into cash quickly and easily.

Now subtract your resources from your expenses. This is the minimum amount of insurance protection you should buy. It’s a good idea to consider these questions every year or so, as your financial situation changes.

A good way to get help figuring out how much coverage you need — and what kind of life insurance policy is right for you — is to talk with a professional agent. When you’re ready to get connected with agents near you, use our free online quote service.