You need enough life insurance to replace your income and cover your dependents’ current and future financial obligations, including outstanding debt, childcare, health care, and education expenses.
How to Calculate How Much Insurance You Need
You can calculate how much life insurance you need by adding your salary, debt, and other obligations. From that total, subtract your assets. The balance represents how much insurance you need. Multiply the balance by how many years you want the coverage to last. You can use an online insurance calculator or calculate it yourself. Need more details?
Income and expenses
When you calculate your income and expenses to determine how much life insurance you need, list everything. Your list might include:
- Your yearly, after-tax income from all sources
- Outstanding debt that your survivors might become responsible for, including credit cards, autos, or a mortgage
- Cost of raising children, including childcare
- Cost of caring for an aging parent
- Current and future education expenses
- Food, clothing, medical, and vacation expenses
- Funeral expenses
Assets and resources vary with each person. For accuracy in calculating how much life insurance you need, make a comprehensive list. Your assets might include the following:
- College funds
- Existing insurance policies
- Subtract your assets from the total of your income and expenses. After subtracting your assets, the total represents the amount of insurance your dependents need each year.
- Multiply the total by ten for ten years of coverage. Other factors can influence the years of life insurance coverage you choose:
- Age of your dependent children
- Number of years left before you’re eligible for retirement income
- Family members who will remain dependents due to illness or other factors, regardless of their age
Factors that Can Change How Much Insurance You Need
Life events can increase or decrease how much life insurance you need.
- Just starting your family – If you’re starting a family and want to have children, the amount of coverage you need will increase with each child.
- Children become adults – As your kids complete their education and become independent, you might be able to reduce the amount of coverage you need.
- Family responsibility – If a family member becomes ill and medical expenses increase, or if you become responsible for an aging parent, think about how much life insurance you need.
- Retirement – As you reach retirement age and have access to more savings and investments, the amount of life insurance your dependents need will likely decrease.
As you’ve read, many factors influence how much life insurance you need. We encourage you to contact us at Hunt Insurance of Raleigh, NC. We’ll answer your questions, explain other factors to consider, and give you a hassle-free quote. Call, text, or e-mail us.
If you leave your job, what happens to your life insurance depends on the type of plans your employer offers. Group life insurance—or employer-sponsored insurance—can have options to port or convert your plan. But not all plans have these features.
Life Insurance After You Leave Your Job
Whether or not you can keep your life insurance if you leave
your job depends on the conditions of the insurance plan. Conversion and
portable plans allow you to retain at least a portion of the insurance.
Some group life insurance policies allow you to convert to
an individual plan if you leave your job. You can convert without a physical
exam or medical questionnaire. Common options are whole life or universal life
- Whole Life – The insurance will be in
effect for your entire—or whole—life. The premiums are fixed and won’t change
with your age or declining health. Although premiums are higher than term life
insurance, your policy can build cash value. You can borrow from the accumulated
cash value or use it to pay insurance premiums.
- Universal Life – Universal life insurance
combines affordability with permanence. It offers the lower premiums of term
insurance, but like whole life insurance, it lasts for the remainder of your
life. The plans your employer provides may—or may not—build cash value.
Portability allows you to continue your life insurance plan
if you’re laid off or voluntarily leave your company. You’ll have term life
insurance protection for a period that is specified by your plan. Depending on
the policy, you can take all or a portion of the coverage after you leave your
job. The plan might specify—in dollars—the minimum and maximum amount of
coverage that you can continue for yourself, your spouse, or a child.
If Neither Option Is Available
If your employer offers life insurance that cannot be
converted or ported, you lose your coverage when you leave your job.
Is Employer-Sponsored Life Insurance Enough?
Eighteen percent of consumers only have group life insurance coverage that is employer-sponsored. Two factors can help you determine if your employer-sponsored coverage is enough:
- Portability or conversion – If your
employer offers life insurance that you can’t convert or port after you leave
the business, consider purchasing additional coverage. Ask the human resources
team at your job about the cost of premiums if you separate—voluntarily or
involuntarily. It may be less expensive to purchase a personal term life
- What’s needed to sustain your survivors? –
Funeral expenses, replacement income, education costs, and more can affect how
much money you want to leave your beneficiaries. For a list of current and
anticipated expenses to consider before you buy an insurance policy, read our
blog post, Did You
Buy Too Much Life Insurance? What Now?
John Hunt, insurance agent and owner of Hunt Insurance of Raleigh, Durham, and Chapel Hill, sponsors this post. Call us for a hassle-free quote: 919-840-8418.
Think you bought too much life insurance? LIMRA’s 2019 report shows that about 57 percent of Americans have life insurance. And 32 percent of those who have insurance only have group insurance, which is usually not enough. But what about your situation? Is the policy you purchased much more than you need?
How Much Insurance Is Too Much?
Several factors influence how much insurance you need.
- Your annual income – If you’re active in
the workforce and anticipate pay increases over the term of your insurance
policy, account for projected increases in your calculation.
- Additional income – Remember to include
social security income, rental property, real estate, investments, and other
funds that you’ll leave for your survivors.
- Existing policies – If you have any
existing policies, factor them in. Keep in mind that if you have a group policy
through your employer, it might not be valid if you change employers. Depending
on the circumstances, you may be able to convert the group policy to an
individual one, but the premiums after you leave the business can be costly.
- Current and anticipated expenses and debt
– Loans, credit card debt, mortgage payments, medical bills, health insurance
premiums, and other expenses–factored them into the amount of income you need
to leave your survivors. Funeral and burial fees can cost up to $10,000, so
include them in the equation.
- Burial/final expenses
- Caregiving for an aged or ill relative
- Business purposes
- Charitable gift
- Estate taxes/liquidity
- Family financial responsibility
- Funds for college education
- Income replacement
- Pay off mortgage
- Raising a child
- Replace a policy
- Supplement a group coverage plan
- Tax advantages save/invest
- Wealth transfer
- Multiply the highest number—your expenses or
income—by 10 to 15 – If you earn $60,000 each year—or if your family spends
that amount—your life insurance policy should provide at least $600,000 for
your family. Some families choose up to 15 times their income or expenses to
cover unexpected events.
Did You Overdo It?
If possible, purchase enough insurance to replace your
income and cover expenses for 10 to 15 years. If 10 to 15 times your expenses
or income is about $800,000 and you purchased a $3,000,000 policy—or multiple
policies that value that amount—you’ve probably bought too much life insurance.
Is It Too Late?
If you think you’ve bought too much life insurance, what can
you do about it now? Talk to a trusted life insurance provider or investment advisor
who can examine the terms of your plan and determine if you’re able to sell the
portion you don’t need. You might be able to turn some of the cost of the
premium into income.
Before you buy your next insurance policy, talk with an independent agent. You’ll receive personalized service and straightforward advice to plan for your loved ones’ future. Contact Hunt Insurance today.