How Much Term Life Insurance Coverage Do You Need To Buy

How much life insurance coverage I need to buy was something that really wasn’t important to me until I got married. My first policy was a $250,000 30 year term life policy and I thought that was plenty. It was not until we had our first son that I quickly realized that was not nearly enough. After his birth, I decided to increase it substantially. That was over two years ago. With us in the process of building our first home and a second son on the way, I’m left wondering even with that increase if I really have bought enough life insurance. I know many struggle with this same decision so I wanted to shed some light how much life insurance is enough.

how much life insurance coverage do you need to buy

First things first, life insurance is for one purpose: income replacement. While there are times where life insurance can aid in more complex estate planning strategies, a majority of the time it’s purchased to take care of your family once you’re gone. My reasoning for purchasing life insurance is that I want to leave my wife and kids without any debt and the ability for my wife to not worry about finances in the event of my unexpected passing.

Life Insurance Coverage to Buy Rule of Thumb

As you can imagine, how much life insurance you need to buy will differ for each person. As a general rule of thumb, it will be a multiplier of your current income based on your age. To illustrate here’s an example that you can use:

Life Insurance Table

Life Insurance Needs Analysis

To determine how much term life insurance you need, you need to perform a needs analysis. Here’s a step by step guide to calculate how much insurance you might need.

Total annual needed by your spouse and children in the event of your death.
Number of years you would like to provide this income to your spouse or children.
Your gross income annually.
Your date of birth.
Your spouse’s gross income.
Would you like to pay off any outstanding debt? For example, mortgage, loans, credit cards, college. If so, enter the debt amount.
Burial expenses. That can include funeral, probate, and any other legal matters.
Total amount of your existing life insurance.
Interest rate assumption. This assumes the interest death benefit proceeds are invested.

Life Insurance Coverage Example

To help illustrate how much life insurance you might need to buy, looks look at an example. First, let’s consider some assumptions. We’re looking at a 30 year old male who makes $100,000 a year. He wishes to give his wife a $75,000 a year income for 30 years if he were to die unexpectedly. We’re also assuming that the wife works and makes a $35,000 a year income. The final assumptions is that there is $400,000 of outstanding debt to pay off (for example, a mortgage and student loan debt), $10,000 for burial expenses and a 6% growth rate on the proceeds.

Life Insurance Example

Life Insurance Amount Needed

Based on the above assumptions, the husband would need to buy $993, 629 of term life insurance. The calculations are as follows:

Life Insurance Needed

Shop Around

When buying life insurance, be sure to shop around rates. I’ve seen life insurance companies differ greatly in their premium amounts. To give you a gauge of what to expect to pay, the $250,000 policy that I mentioned that I took out when I was 28 cost me around $220 a year. That’s it! A couple reasons that it was so cheap was: