How much life insurance do I need?

Last updated: January 1

The amount of life insurance you may want depends on a number of different factors. You'll likely want to consider your current financial obligations, such as your mortgage, debt and childcare. Consider your family's comprehensive future needs, including educational costs and retirement funds. Also take into account current assets that might increase in value. These considerations, along with the length and type of policy you choose, can help you estimate the amount of life insurance that might be right for you and your family.

Based on these factors, and the length and type of the policy you choose, this article may help you decide how much life insurance is right for you.

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How to choose life insurance for first-time buyers

Maybe a new baby sparked thoughts about the future, or perhaps you want to help protect your family's lifestyle. Whatever your reason, life insurance may be an important part of your financial strategy and a safety net for your loved ones

The benefits from a life insurance policy may help your family cover expenses like mortgage payments, college tuition and day-to-day expenses if you pass away. Some policies even have a savings component, called "cash value," that you may borrow from in case of an emergency¹.

If you're buying life insurance for the first time, knowing the basics as you start your search can be helpful. Here are some things to keep in mind as you consider life insurance policies.

Reasons to purchase term life insurance

A term life insurance policy may be useful if you want coverage for a specific time frame — maybe until your kids graduate college or your mortgage is paid off. Term policies typically provide coverage for a set period, usually from 10 to 30 years, as long as you continue to pay premiums. If you pass away during your policy's term, your beneficiaries will receive the policy's benefit. Term life insurance policies are often more affordable than permanent life insurance policies, because they only provide coverage for a designated time frame, according to the Insurance Information Institute (III).

If you're concerned that your needs may change or you'll eventually want permanent coverage, talk to your agent about getting a "convertible" term policy. Convertible term policies provide the opportunity to convert to a permanent life insurance policy. Keep in mind that your premiums will likely increase with the change.

Reasons to purchase permanent life insurance

With permanent life insurance, as long as you continue to pay adequate premiums, the policy will remain in force. Permanent life insurance may be a good choice if you want to have coverage for the rest of your life. The III says premiums typically remain the same over time.

In addition to the death benefit, permanent life insurance also provides a savings element, called cash value. Cash value may be available for you to borrow from1 or used to help pay your life insurance policy's premiums.

Premiums for permanent life insurance tend to be higher than term policies, due to the cash value feature and the length of coverage, says the III.

Depending on the type of permanent life insurance policy you choose, additional options and benefits may be available to you. For example, with whole life insurance, the cash value typically increases at a predetermined schedule. Universal life insurance may offer the flexibility of adjustable death benefits and premium payments. A variable universal policy may offer the flexibility of universal life as well as a choice of investment options for your policy's cash value.

Your agent can help explain the types of permanent life insurance policies so you can decide if one of them might be right for you.

Choosing life insurance coverage amounts

In addition to choosing the type of life insurance policy, you'll also need to determine how much coverage you'll need. First off, it's a good idea to plan for your policy's benefit to cover your final expenses, including funeral costs and estate taxes, says the III. Here are some additional factors that may influence how much life insurance coverage you'd like to buy:

  • Your income
  • Your age
  • Existing debt
  • Current expenses
  • Future expenses, such as sending children to college

How much you pay for a life insurance policy is based in part on the amount of coverage you buy. Other factors that may affect your life insurance premium include your age and health at the time of purchase. Your life insurance company may require you to undergo a medical evaluation or provide detailed medical information.

Choosing to purchase life insurance is a big decision, and it's important to choose a policy that fits your family's needs.

Life insurance myths debunked

The decision to buy life insurance is often met with hesitation, confusion or even denial. It’s not an easy subject to talk about. But when it comes to protecting your loved ones with life insurance, it's important to separate fact from fiction.

Myth: I don’t have children, so I don’t need life insurance

Even if you don't have a spouse or dependents, life insurance benefits can be used to help your loved ones pay off your debts (like private college loans, for instance) if you pass away. Consider debt such as your mortgage or your car loan. Planning early can help protect your loved ones from burdensome expenses.

Myth: I can’t afford life insurance

Many consumers overestimate the cost of a term life insurance policy, according to Life Happens. Life insurance can be affordable for many people, depending on the type and amount of coverage you're looking for. You can start with a policy that fits your budget, and you may be able to purchase additional coverage later on.

Myth: I’m a stay-at-home parent, I have no income – I don’t need life insurance

If you're a stay-at-home parent, life insurance is still important. While you may not bring in an actual paycheck for the household, you likely provide services that could cost tens of thousands of dollars to replace each year. These may include childcare, daily transportation, home maintenance and cooking, to name a few. If you were to pass away, life insurance benefits may help cover some of these costs.

Myth: I have a life insurance policy through my job – if I change jobs or get laid off, I can take the policy with me

Typically, your employer-offered life insurance policy isn't portable — meaning if you leave your job, you're probably also leaving your life insurance protection behind. However, when you buy your own, separate life insurance policy you decide how long you want to be covered. Additionally, with an individual policy, you may be able to get more personalized coverage that fits your financial needs.

Myth: my beneficiaries will have to pay income taxes on the proceeds from my life insurance policy

Your life insurance benefits are generally income-tax free and do not have to be reported on your tax return, according to the Internal Revenue Service (IRS). That means if you pass away, your beneficiaries would not be taxed on the benefit paid out from your policy. However, any interest payments on top of the policy amount may be taxed.

Myth: if I get term life insurance, I can’t convert it to a permanent or whole life insurance policy

It is possible to convert some term life insurance policies into a permanent life insurance policy, depending on the policy you purchased. However, it's a good idea to speak with your agent up front, as convertible term policies typically must be converted within a specified time period. You also may encounter additional requirements with a convertible term policy, such as increasing premiums.

Myth: I don’t need life insurance once my children are adults

Life insurance can help you in many different stages in your life. Having life insurance later in life has a number of advantages, such as helping to relieve the burden of paying for final costs, paying for state estate taxes your heirs may face, paying off debt you may have left behind, or simply leaving your children with an inheritance.

Myth: I have a comfortable amount of savings, so I don’t need life insurance

While your savings may last through your retirement, have you thought about final expenses? According to the National Funeral Directors Association, the national median cost of a funeral with a burial is about $7,300. If you don't have enough money saved when you pass away, your loved ones may have to pay for your funeral costs.

Another thing to keep in mind is your mortgage. If you don't have enough in savings and your mortgage has not been paid off, your loved ones also may not be able to hold onto your home. A life insurance policy's death benefit can help alleviate some of this burden after you pass away.

Life insurance frequently asked questions