How much life insurance do I need?
By Allstate
Last updated: November 2023
The amount of life insurance you may need depends on a number of different factors. You'll likely want to consider your current financial obligations, such as your mortgage, utility bills, debt, childcare and more. 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.
Life insurance calculator
To get an estimate of how much life insurance you might need, select “get started” and begin entering the value in each field. Below is a brief breakdown of some of the fields you’ll fill out.
Income replacement
Your “net annual income” describes how much you make in a year before taxes. The next question will ask about the financial support that your family would receive in the event of your passing, based on the terms of your insurance policy. Specifically, it wants to know how many years’ worth of your current income would be covered by the death benefit of your insurance policy. This is important because it helps determine how long your family would be financially secure after you pass away.
Mortgage balance
A mortgage balance is the amount of money you still owe to the bank or lender after you've borrowed money to buy a house. It's like a big loan you use to purchase your home. Every month, you make a payment to the bank that covers a part of this loan, along with some interest. As you make these payments, the mortgage balance goes down. Eventually, when you've paid off the whole loan, your mortgage balance becomes zero and you fully own your house.
Other debts and expenses
Your debt includes regular payments you have to make. That might be monthly credit card payments, car payments, auto insurance payments, student loans, other kinds of loans and more. Be as accurate as you can to get the best estimate possible.
Your final expenses are a total of what is still owed after your passing, such as medical bills or funeral-related expenses (i.e., burial plot, casket, ceremony). Again, this is only an estimate. For a point of reference, the median cost of a funeral with viewing and burial in 2021 was $7,848, according to the National Funeral Directors Association (NFDA). These costs do continue to grow annually, and can vary greatly, depending on where you’re located and your specific preferences.
Education expenses
Here, you’ll enter in your child’s education expenses, which may include college or private school tuition, books and supplies, field trips, tutoring, lunch or meal plans and more. Remember, these costs can vary widely depending on the school, location, and your child's specific needs.
Your assets
Your "available assets” refers to how much money and valuable things you have that can be turned into cash fairly quickly. This helps your insurer better understand your financial situation.
Available assets can include:
- Money you have in your bank accounts.
- Investments like stocks or bonds that can be changed into cash.
- Valuables like jewelry or valuable collections.
- The value of things like your house or car.
- Group life insurance through work
This all factors in to how much life insurance you may need to protect your family if something were to happen to you. For life insurance through your job, understand that it’s often not enough to cover your financial obligations and it doesn’t travel with you if you change jobs. It's important to be honest when answering these questions so you can get a life insurance policy that’s tailored to you.
What is life insurance?
Life insurance is like a promise you make to take care of your loved ones even if you're not around anymore. You pay a certain amount of money to a company called an insurance company, mutual company or fraternal benefit society. In return, if something happens to you and you pass away, the insurer gives a lump sum of money to the people you choose, like your family or other beneficiaries. They can use this money to cover things like bills, mortgage or education expenses.
There are different kinds of life insurance. Some last for a certain number of years, while others last your whole life. The amount of money your loved ones receive depends on the type of insurance and how much you've paid into it. Life insurance gives you peace of mind, knowing that your family will have financial support even if you're not there to provide it. It's an important way to take care of those you care about, even after you're gone.
Who typically needs life insurance?
Life insurance is especially important for people who have others depending on them financially. This can include parents who have young children – if something were to happen to the parents, life insurance can help financially take care of the kids to help pay for things like education and everyday needs. It's also important for couples who share financial responsibilities, like paying a mortgage or other loans.
If you have aging parents or other family members who depend on you, life insurance can help provide for them. Even if you're single, life insurance can be useful if you have debts that you wouldn't want to pass on to your family. In short, if there are people who rely on you for financial support, having life insurance is a way to make sure they're taken care of if something unexpected happens to you. And, if you’re a small business owner, life insurance can help you with succession planning and funding.
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. However, some policies can be funded with a single large payment or a limited number of payments – like paying for 10 years, 20 years or until a certain age.
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 It’s worth learning more and weighing out the benefits of term vs. universal life insurance. 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 insurer 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. If only a portion of your current life insurance needs can be covered due to your budget, it’s important to work with your insurer or agent to find a solution that at least provides some protection.
The DIME method
The DIME method is a simple way to figure out how much life insurance you might need. Each letter represents a variable that can help you estimate the amount of life insurance that’s right for you:
- D - Debt: This means adding up all the money you owe, like mortgages, loans, or credit card debt. This is important because you want your life insurance to cover these debts so your family doesn't have to worry about them.
- I - Income: Think about how much money you make in a year. Multiply it by the number of years you want your family to be financially secure if something happens to you. This helps replace the income you would have earned.
- M - Mortgage: If you have a house or condo, think about how much is left on your mortgage. This is the amount you'd want to pay off with your life insurance so your family can keep the house.
- E - Education: If you have kids, think about how much money you'd want to set aside for their education, like college or special classes. Or, helping with other large financial burdens like their first home or a wedding, if you can’t be there.
Add up all these amounts to get an idea of how much life insurance you might need. It's a good way to make sure your family has enough money to cover important things if you're not there to provide for them.
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. Also, your health can change in the future – it’s typically more affordable to purchase life insurance while you’re young and healthy.
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, just 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 is a commitment to your loved ones, providing them with financial support if you're no longer around. It can help cover important expenses like bills, mortgages or your children’s tuitions. But no two life insurance policies are the same. That’s why, it's crucial to choose the right type and amount of coverage based on your individual needs. You can use the Allstate calculator to get an idea of how much life insurance might be right for you, plus compare quotes to see which insurer offers the most value for what you pay. If you already have life insurance, don’t hesitate to reach out to your insurer with any questions you may have.
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 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.