Life Insurance
How Much Life Insurance Do I Need?
Ethos Life
Grandfather father and son on couch
If you have a family or if you provide financial support for someone, you probably need life insurance. Determining how much life insurance you need to cover outstanding debt is fairly straightforward; however, figuring out how much life insurance is needed to provide for the future of your loved ones can be more difficult. Here are a few tried-and-true guidelines you can use to help you determine how much life insurance you might need.

How to Determine a Coverage Amount

A goal for many wage-earning adults is to have enough life insurance to provide for the future of their family, cover outstanding debts, and pay for funeral and burial costs. If you're ready to get started now, you can try our tool to help you estimate your needs.

If you're still deciding about the life insurance coverage amount that might be right for you, consider the following:

1. Future Earnings

Replacement of income is important if you need a life insurance policy to provide for dependents after your death.

In most cases, it’s safe to calculate a policy payout that can replace income for as many years as your dependents would have needed you to provide for them in life (until your kids are grown up and out of the house). Most people purchase insurance to cover 7 to 10 years of their income as a minimum.

For stay-at-home parents and caregivers, this calculation is just as important, but it can be tricky. Try to figure out how much it would cost to hire a nanny and housekeeper for two years, and plan to cover at least that cost with the life insurance policy.

2. Debt

Debts held jointly, or with a cosigner, will become the sole responsibility of the living party, regardless of their ability to pay.

For that reason, it’s important to make sure that the life insurance policy easily covers any outstanding debts. Be sure to include mortgages, credit card balances, car loans, personal loans, student loans, and any other outstanding bills. It’s also crucial to include any outstanding loans or mortgages that have a cosigner or are jointly held.

When a person dies, their money can be used to pay outstanding bills. If the amount they owe is less than the amount of money they had on hand, their estate is considered “solvent” and any leftover funds will go to the deceased person’s beneficiaries or heirs at law if they didn’t have an estate plan.

If there isn’t enough money to cover debts, the estate is labeled insolvent. Any money available will go toward paying off debt held in the deceased person’s name and will be applied according to state law. In this case, the beneficiaries of the estate get nothing, and are responsible for handling any remaining unpaid debt.

3. Funeral And Burial Costs

If you have enough money to cover the cost of a funeral and burial expenses, those costs will be paid before other debts.

There are three things that families must pay for after a death. While costs vary widely, an average funeral in America costs around $10,000. There will be costs associated with the funeral home’s services, the cemetery, and the grave marker or headstone.

If your family doesn’t have several thousand dollars to spend on a funeral, make sure you add that amount to your total life insurance coverage.

4. Other Expenses

While other expenses like future education costs of dependents and medical bills can be difficult to estimate, it’s still important to account for those costs. Think carefully about these factors as you go through major life changes.

When a baby is born or adopted, when you marry or divorce, or if you have a family history of certain types of illnesses, your situation may require an increase in the amount of life insurance you need.

If you have children, calculate the number of years from now until the youngest graduates from high school. Determine the portion of your yearly income that is allocated to caring for your family. Multiply that amount by the number of years until graduation. For some, this represents the minimum amount of life insurance coverage needed.

Stay-At-Home Parents

Many families underestimate the need to buy life insurance for a stay-at-home parent. While there may not be income to replace, in the event of that parent’s death, the other parent will need to continue to work.

A stay-at-home parent brings economic value to a home, even if they don’t bring in a paycheck. Estimate how much it will cost per year to hire people to care for the children while the other parent works.

Consider the costs of a nanny or babysitter and housekeeper, as well. Don’t forget to add in the costs of a burial and funeral for a stay-at-home parent. These costs can financially devastate a family that isn’t properly insured.

Life Insurance For Children

When families put life insurance in place for parents, they often wonder if they should also purchase policies for their children. In general, life insurance for healthy kids is inexpensive. Since children don’t typically contribute to the income of a household, there may not be a need to purchase life insurance for any amount above funeral and burial costs. Only parents with experience can fully understand the strain the loss of a child can place on the surviving family. In these unfortunate situations, life insurance can provide financial support while the family grieves and learns to cope with their loss.

Increasing Your Life Insurance Coverage

As interest rates and inflation change, you may find that you need more insurance to compensate. For growing families, increasing the total amount of life insurance coverage may be necessary.

Every few years, you might want to go through this process again to consider new financial developments. As your family’s dependence on you decreases and your savings balance increases, you may also find that you need less life insurance coverage over time.

If you decide to increase the amount of your life insurance coverage, the insurance company may ask for current information regarding your occupation and health condition. This will determine the price and the amount of coverage that you qualify for at the time you apply.

In Short…

How much life insurance you need is completely dependent on your debts, how much money your loved ones would have immediately available to them in the event of your death, and how much income you need to replace. You might also consider coverage that includes other expenses like funeral and burial arrangements as a courtesy to your family and friends.

The amount of life insurance you purchase is a very personal decision, but taking the time to consider it carefully can be an act of loving kindness.

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