How Much Life Insurance Do I Need?

Life insurance is a crucial product to purchase, as it provides essential financial protection for your family. Yet 106 million people either don't have any life insurance or enough life insurance coverage.

People often consider life insurance an "optional" form of insurance coverage. Unfortunately, viewing it through this lens isn't the best option. Without it, your loved-ones may be financially vulnerable if something unexpected were to happen to you. Life insurance is the only way to ensure your family will not be financially impacted while still being able to maintain their current lifestyle if you die unexpectedly.

One of the questions many people ask is how much they should buy and the answer is, it depends. And that’s because everyone’s financial situation and reason for needing life insurance is unique.

So, how much life insurance do I need? Let’s take a look at what factors are involved when determining the type of coverage and cost within this guide.

If you're looking to get the best life insurance rate, here are some tips that may help you out.

Shop around

It's important to get quotes from multiple insurance companies to compare rates and coverage options. This can help you find the best rate for the coverage you need.

Choose term life insurance

Term life insurance is generally more affordable than permanent life insurance. It provides coverage for a specific period, such as 10, 20, or 30 years, and can be a good option if you have a tight budget and need a large coverage amount to cover debts like a mortgage and other outstanding loans.

Maintain a healthy lifestyle

Insurance companies typically consider your health when determining your life insurance rate. Maintaining a healthy lifestyle, such as eating a balanced diet and exercising regularly, can help you qualify for a better rate.

Quit smoking

If you smoke, you can expect to pay a higher premium for life insurance. Quitting smoking can not only help you save money on life insurance, but it can also improve your overall health.

Choose the right coverage amount

The coverage amount you choose can affect your premium. Choosing the right amount of life insurance coverage, based on your needs, can help you get the best rate.

The cost of life insurance can vary widely based on individual circumstances so make sure you do your homework so you can find a policy that fits your budget and provides the coverage you need.

Everyone buying life insurance has unique circumstances. Therefore, no set answer applies to everyone. Instead, consider the following three factors as you ask yourself “how much life insurance do I need”:

Finances

Finances play a significant role in the type of life insurance coverage you would get and how much you need for a few reasons.

First, the amount of coverage you can afford will determine the type of policy you can purchase. For example, term life insurance policies are typically the most affordable option and provide coverage for a set period of time, whereas permanent life insurance policies, such as whole life or universal life insurance, are more expensive but provide coverage for the policyholder's entire life.

Second, your financial situation may impact the amount of coverage you need. If you have significant debts, such as a mortgage or student loans, or if you have dependents who rely on your income, you may need a higher amount of coverage to ensure that your loved ones are well taken care of in the event of your unexpected death.

Overall, finances play a crucial role in the type of life insurance coverage you would get because your budget and financial needs will determine the amount of coverage you can afford and the type of coverage you need. It's important to carefully consider your finances when selecting a life insurance policy to ensure that you have the right level of coverage to protect yourself and your loved ones.

Health

Health plays a critical role in the type of life insurance coverage available to you and how much it will cost. This is because life insurance companies use your health as a key factor in determining the level of risk associated with insuring you.

When you apply for life insurance, you will typically be required to provide information about your health, such as your medical history, current health status, and any pre-existing conditions. This information helps the insurance company assess the risk of insuring you and determines the premium rates you will be charged.

If you are considered to be in good health, you will want to consider applying for a fully underwritten life insurance policy so you can get the best rate. This type of policy involves a more in-depth evaluation of your health, including medical history, lifestyle, and any pre-existing conditions. Underwritten policies typically offer higher coverage amounts and lower premium rates because the insurance company has taken a more indepth look into your health.

There are simplified issue products available that are designed to offer fast and easy coverage without requiring a medical exam. Instead, you have to answer a series of health-related questions on the application. Simplified issue policies typically have higher premium rates than traditional underwritten policies and offer lower coverage amounts.

If you have a history of health problems or chronic conditions, you may be considered a higher risk and may pay higher premium rates, or your application may be denied altogether. If this is the case, there are policies that do not ask any health questions and do not require a medical exam, but those guaranteed issue type policies are typically for people over the age of 50 and have limited coverage amounts.

Standard of Living

Standard of living refers to your current lifestyle. If you died, could your family continue their current lifestyle? If not, how would this disrupt their life?

Your family can use their life insurance proceeds to pay for many things. For example, they could use it to pay off the house mortgage so they don’t have to worry about possibly moving.

They could also use the money for food, shopping, and traveling. Without a life insurance payout, your family's way of life could suffer tremendously.

In addition to health and finances, there are pieces of information that will assist in determining what coverage options are available and what solution best suits your needs.

Date of Birth

In addition to your date of birth being a key factor in determining the cost of coverage, it will also determine what type of policy you qualify for. There are age limitations on different life insurance plans, for example, if you want to purchase a 30 year term policy, in many cases you have to be younger than age 55 to qualify.

If you are looking for a guaranteed issue final expense product, then you have to typically be over the age of 50 to apply.

Annual Income

How much money do you earn each year? What is your combined family income? This information reveals details about your lifestyle and helps you determine how much life insurance coverage you need and can afford.

Your income doesn't directly affect your rates. Instead, it affects the amount of coverage you can purchase.

Total Debt

If you have outstanding debts such as a mortgage, car loan, credit card debts, etc, they can be a significant financial burden for your loved ones if you pass away. Knowing your total debt will help determine the amount of coverage needed to ensure that your beneficiaries can pay off any outstanding bills and maintain their financial stability.

Total Savings

The amount of savings you have can affect the amount of life insurance coverage you need. For example, if you have substantial savings, the recommended life insurance policy might be less, as the savings can be used to cover some of the expenses that the beneficiaries might have to cover.

On the other hand, if the policyholder has little or no savings, the recommended life insurance policy might need to be higher because your beneficiaries would have little means of covering any expenses left behind.

If you plan to use your savings to finance future expenses, such as college tuition, retirement, or long-term care, the life insurance coverage amount needed should take these expenses into account as well.

Every person that buys an insurance policy will most likely have a different rate. This is because each person has a unique set of circumstances. Then when you factor in age, policy type and coverage amounts, the price will differ even more. For example:

A 30 year old with a 10 year, $250,000 term-life insurance policy might pay about $15 per month, while a 60 year old buying the same policy might pay more than $80 per month. It’s important to point out that these costs will vary widely based on individual circumstances, term lengths and coverage amounts.

As a general rule, the younger and healthier you are, the lower your life insurance premiums will be. Conversely, if you are older with health issues you may have to pay higher premiums.

While the cost of life insurance can vary widely based on individual circumstances, it's important to shop around and compare policies from different insurance providers to find a policy that fits your budget and provides the coverage you need.

Life insurance provides financial protection for your loved ones in case something unexpected were to happen to you. Whether it’s to replace income lost, pay off debts, cover final expenses or leave a lasting legacy, having life insurance will provide peace of mind knowing that your loved ones will be taken care of financially.

Our content is created for educational purposes only. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Everdays encourages individuals to seek advice from their own investment or tax advisor or legal counsel.