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How Much Life Insurance Do I Need?

Families (and financial needs) come in all shapes and sizes. That’s why life insurance plans do, too.

Since life insurance is meant to be a financial safety net for your family, it’s important to choose an amount that will help keep them covered for the long haul if they need it. But finding the right amount of life insurance doesn’t have to be complicated. If you’re wondering “how much life insurance do I need?,” here’s a simple guide to crunching the numbers.

How much life insurance do I need?

If you’re thinking about life insurance, you’ve already taken a big step toward protecting your family. With any life insurance purchase, a good place to start is deciding whether you need coverage at all.

The short answer: If other people are depending on you financially (or will be in the future), life insurance is an important part of your financial planning. The payout from a policy can help provide a cushion for your partner and kids if they no longer have access to your income, or cover big-ticket expenses like a mortgage or college tuition.

Depending on why you’re buying life insurance, there are many types of plans to cover you and your family’s needs. When deciding how much life insurance you need, you’ll want to consider:

  • The coverage amount. This is the amount of money your loved ones will get from your life insurance company if you die while the policy is in effect. There are a wide range of options when it comes to coverage amounts. For example, if you’re shopping for term life insurance, Fidelity Life offers plans from $50,000 to $2 million.
  • The term length, if you’re choosing a term policy. This is how long the coverage will last, and typically ranges from 10-30 years. With a permanent life insurance policy, you’ll stay covered for your entire lifetime as long as you keep up with your premiums.
Family running on a beach
Family running on a beach

Find a policy that works for you

There are a range of affordable Fidelity Life products to choose from based on your situation and financial responsibilities.

How do I calculate how much coverage I need?

When you’re planning for your family’s financial future, the size of your life insurance payout is one area where it’s important to get it right. This is money your family is counting on for everything from groceries to tuition payments. If you’re no longer there, you can’t earn money to support them, and a life insurance policy can provide that financial bridge when they need it most.

If you buy too little life insurance from your life insurance company, your family may have trouble keeping up with bills and other financial obligations. Inadequate coverage is a common concern among Americans, with a 2020 insurance industry study reporting that nearly half of people who own life insurance either think they don’t have enough coverage or aren’t sure.

While being underinsured is usually the bigger issue, you also don’t want to buy a much larger amount of life insurance than you need. Life insurance costs money, and that money could go toward other things, like building up an emergency savings stash.

As you explore “How much life insurance do I need?,” a rule of thumb can give you a quick ballpark figure. There are plenty of guidelines like these, such as purchasing seven to 10 times your annual income in life insurance. Remember, though, these rules of thumb aren’t a perfect science. If you’re debt-free and have a big savings cushion, you may not need as much coverage as someone who’s paying off six figures in student loans.

A better approach is to calculate your ideal coverage amount based on your financial needs and assets. A generic formula you can follow is:

Financial obligations – assets = potential coverage amount needed 
When thinking about financial obligations, consider current expenses as well as future ones. Life insurance should help you protect your family’s present and future, so think down the road to what might come up, from braces to a family wedding.

How to calculate your financial obligations

As you are calculating any debt or other obligations to cover, consider these common expenses:

Mortgage or Rent Payments

Life insurance helps make sure your family can keep up with housing payments, so they’re not forced to move should something happen to you. When you consider your expenses, don’t forget to factor in property taxes and home upkeep.

Loans and Debts

This includes debts like student loans and car loans. According to Business Insider, the average millennial has $29,800 in student loan debt. If your spouse or child co-signed on the loan, they’re on the hook for those debts if you die. You’ll also want to factor in things like credit cards, medical bills, and other forms of debt you may have.

Day-to-Day Expenses

Think about the amount of money your family will need to live on, including your spouse and dependent children. The U.S. Department of Agriculture reports that it costs $233,610 on average to raise a child. That’s a lot of diapers and clothes, so make sure your family is prepared to pay for it all.

College Costs

Planning on helping your kids with college? Set aside some money to cover those costs. According to U.S. News, the average cost of tuition in 2020 ranges from $9,687 for an in-state public school to $35,087 for a private college for one year. It’s also important to keep in mind extra things like book purchases and supplies for your child when they go to college.

End of Life Expenses

The average funeral costs $10,000 or more. To ensure your loved ones have peace of mind during an already difficult time, it’s important to make sure your family has enough money to cover yours. Life insurance can also help cover medical bills, hospice costs, or other expenses that come up at the end of life.

Legacy Gifts/Financial Cushion

If you want to leave behind something extra for your kids, grandkids, or even your favorite charity, life insurance can help make it happen. Your loved ones can use that money to save, take a vacation, or do something else you would have wanted to provide for them.

How to calculate your assets

Once you’ve tallied up your financial responsibilities, factor in any assets that can help pay for these costs. This may include savings and investments, like money you’ve built up in your personal bank accounts, stocks, inheritance from relatives, and retirement plans.

If you have any other life insurance policies, you can count those as well. Be careful, though, if you’re counting on a group life insurance policy from your work. These policies typically don’t come with you if you switch jobs, so it’s important to have enough individual coverage to meet your family’s needs.

Use Our Term Life Insurance Coverage Calculator

When you’re ready to do the math, Fidelity Life has an online term life insurance calculator to help you determine how much life insurance you need. It takes just a few minutes to plug in basic details about your family, income, and debts to get a personalized recommendation for a coverage amount. Our agents can also help advise you based on your unique financial situation and personal goals.

Choosing a life insurance term length

If you’re thinking about buying a term life policy, the question “How much term life insurance do I need?” involves choosing a term length as well as a coverage amount.

Term life insurance plans provide coverage for a set period of time, whether you’re filling a gap before retirement or need coverage until your house is paid off and your kids are out of school. A “term length” indicates how long your policy lasts. At Fidelity Life, we offer term lengths of 10, 15, 20, and 30 years.

Because they eventually expire, term life plans are much more affordable than permanent life insurance, which covers you your whole life and allows you to build cash value. Like auto or home insurance, term life is just-in-case coverage that protects your family if the worst happens. The affordable rates and flexible options make term life a good bet for most families.

Finding the ideal term length for you starts with factoring in all your expenses and responsibilities. Since you’re buying life insurance to protect your family financially, consider how long you’ll need that protection to cover any current and future needs like:

  • Dependent children
  • Mortgage
  • Student loans
  • Replacement income to cover a spouse
  • Credit card debt or medical bills

Depending on your stage of life, your ideal term length can vary. If you are getting married, starting out in a new career, or planning to have kids, you might want a 30-year term to cover you and your family through these major life changes. Most mortgages last for 30 years, so a 30-year term life can also be a good fit if you’ve just bought a house.

If your kids are in college and you only have a few years left on that mortgage, a 10- or 15-year plan might work better. Also, make sure to round up your term length if needed. Paying off your mortgage in 13 years? Get a 15-year term for maximum protection.

Once you reach the end of your term, you have a few options. You may be able to renew your policy and extend the coverage period, apply for a new policy altogether, or just let it expire if you don’t need coverage anymore.

Personal factors to consider when choosing coverage 

As you think about your family’s financial needs, there are a few other personal factors that can influence your coverage amount and term length. Some key areas to keep in mind are:

Your Budget

Both the amount of coverage you buy and the term length will affect the premium price you pay every month, so consider how much you can afford when looking at life insurance rates. That said, life insurance is much more affordable than most people think. According to a 2020 study, the average American estimates that term life insurance costs three times more than it actually does – which means you may be able to afford more than you realize.

Your Age and Health

How old you are affects the price you pay for life insurance. In general, the cost of life insurance goes up with each year as you get older. That means a $250,000, 10-year policy for a 40-year-old costs more than a $250,000, 10-year policy for a 30-year-old, even though they’re getting the same amount of coverage. Your eligibility for certain term lengths can also depend on your age and health. For example, some insurers won’t approve you for a 30-year term life insurance plan after a certain age, so talk to an insurance agent about your options.

Your Partner’s Coverage

If you have a partner, think about how to balance coverage between the two of you. If you’re both working, life insurance can help make sure your partner is able to support the household and even take some time off of work after your death, if needed. You’ll want to factor their salary into your coverage calculations, but also make sure they don’t have to shoulder expenses all alone. Even if you stay at home, getting life insurance can help your partner afford help for all the things you take care of around the house, like childcare and keeping up with housework. Most insurers will approve you for up to half of your partner’s income.

Why it can pay to buy more life insurance

Life is uncertain, and that’s why life insurance exists. While you don’t need to splurge on an enormous policy if you have modest needs, it can be smart to invest in a little extra life insurance for added peace of mind later. If you’re trying to decide between a few options, here’s why you might want to consider a bigger policy.

  • It will never be cheaper than it is now. Your life insurance rates go up each year, so now is the best time to get a good deal. If there’s a chance you’ll need it later, consider buying life insurance ahead of time, so that you’re covered no matter what.
  • A little more now can mean a lot more later. It’s worth noting that the difference in price between two policies often isn’t that large. For example, a $250,000, 20-year Fidelity Life policy for a 30-year-old woman is $22 a month, and a $500,000, 30-year policy is $37 a month. You may not notice that extra $15 payment in your monthly budget now, but your family will definitely notice and appreciate that extra $250,000 if they need it.
  • To protect against the unexpected. Life happens – new babies, layoffs, new houses, and medical emergencies can all impact your financial obligations. Most people also have their income rise as they advance in their careers, and inflation can mean your family needs more financial support than you originally thought. You may have the math worked out now, but things can change.
  • In case you’re not able to qualify later. Health issues down the road may make it more expensive and harder for you to qualify for coverage. It’s better to lock in coverage now for as long as you may need it, so you can have peace of mind for the future.
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