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.
How to choose life insurance for first-time buyers
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
If you've decided to purchase a permanent life insurance policy, you'll need to choose which type of permanent life insurance is best for you. Four types of permanent policies — whole, universal, variable universal, and indexed universal — typically offer a built-in savings component (called "cash value"). The policies vary in how the cash value is invested and whether it may affect the policy's benefits or premium payments.
When you purchase a life insurance policy, you'll need to select a beneficiary who will receive the policy's benefits if you pass away. The beneficiary can be a person, such as a spouse, sibling or child. Your beneficiary may also be an entity, such as your alma mater or favorite charity. Choosing a beneficiary can be a very emotional decision, but it's an important one that helps ensure your policy's benefits are dispersed according to your wishes.
According to the Insurance Information Institute (III), your life insurance coverage may lapse if you miss a premium payment on a term life policy.
The III notes, however, that you may have a few options if you can't pay a premium on a permanent policy. You may be able to use the policy's cash value toward the premium, which would allow you to remain covered. Some policies may also allow you to temporarily stop or reduce your premium payments. In order for these options to be available, however, the policy must have enough cash value accumulated to cover the payment amount. If you cannot access these options and cannot pay the premium, your coverage may lapse.
Insurance policies typically have a grace period to prevent a policy from lapsing if you are late on a payment. This grace period is determined by state regulations, and it may also vary among insurers and policies. Check your policy or ask your agent to be sure you know what your grace period is and when you need to pay the premium.
The Internal Revenue Service (IRS) says benefits paid out from a life insurance policy are generally not subject to federal income taxes, provided they are received as a result of the insured person passing away. In that case, your beneficiaries would not have to report the amount or include it as gross income on federal tax returns.
However, any interest that beneficiaries receive in addition to the policy amount is considered taxable and should be reported to the IRS. If your beneficiaries receive the proceeds in installments that include interest payments, the amount of interest included in the payment is typically considered taxable income, says the American Institute of CPAs. For example, if your beneficiaries receive a total of $101,000 for a $100,000 life insurance policy, the $1,000 is taxable at their income rate.
State tax rules vary from state to state. A tax advisor or your state's tax agency can provide information on what benefits, if any, are taxable in your state.
If you have a life insurance policy with cash value or accelerated death benefits, you may be able to make a partial withdrawal of your policy's funds without incurring a federal income tax liability.