Answers · Life Insurance

How much life insurance do I need?

Enough to cover the jobs the money would actually do, minus what you already have. Add up the debts you would want paid, the income your family would lose for the years they would need it, and any big costs ahead. Then subtract savings, existing coverage and survivor benefits. What is left is the gap. For many people near retirement, that gap is small.

Ten times your income is a guess, not an answer.

The rule you hear most is to buy ten times your salary. It is easy to remember, and that is about all it has going for it. It does not know how old your kids are, what you owe on the house, or what you have saved.

Two people on the same salary can need very different amounts. One has a new baby and a big mortgage. The other has grown kids and a paid off house. A multiple of income treats them the same.

Quick note on who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary. This is general education, not advice about your situation.

Add up what the money would have to do.

Start with the jobs, one at a time. Debts you would want cleared, like the mortgage or a loan you co-signed. The income your family would lose, for as many years as they would need it. Big costs coming up, like college. And the immediate costs of a funeral and settling an estate.

Then subtract what is already there. Savings your family could use. Coverage you already own, including any through work. Social Security survivor benefits, which can be paid to a surviving spouse and to children under 18. Your own estimate is on your statement at ssa.gov. Skip this step and you will almost always buy more than you need.

One family, worked through.

Say a 40 year old earns 100,000 a year. Their spouse earns 50,000. The kids are 6 and 9, and the mortgage balance is 400,000. These numbers are illustrative only.

The needs: 400,000 to pay off the house. About 60,000 a year to cover the income gap for 15 years, until the youngest is out of school, so 900,000. Another 100,000 for college, and 15,000 for final costs. That is 1,415,000.

What is already there: 150,000 in savings, a 100,000 policy through work, and an illustrative 300,000 of survivor benefits over those years. That is 550,000. The gap is about 865,000. This example ignores inflation and what the money could earn, on the assumption that they roughly cancel out. Real plans should check that.

So this family might look at around 850,000 to 900,000 of term coverage, sized to last until the kids are grown.

At 60 the number usually shrinks, and sometimes it is zero.

Run the same math at 62. The kids are grown. The mortgage has 80,000 left. There is 900,000 in retirement accounts. Most of the jobs from age 40 are gone.

What tends to remain is narrower. A surviving spouse's income, because two Social Security checks become one and a pension may shrink. An estate that would leave one child the house and another child less. A debt that would land on someone else. Final expenses.

Sometimes the honest result is that you are already covered, or that an existing policy just needs a review. That is a fine outcome.

Your coverage through work may not be there when you need it.

Group life through an employer is often one or two times salary. It usually ends when you leave the job or retire. Some plans let you convert or carry it with you, often at a higher price.

Count it in the math while you have it. Just do not let it be the whole plan if you might change jobs, get laid off or retire before the need goes away.

What you qualify for is not what you need.

Insurers will often approve far more coverage than your family would ever use. A bigger policy means a bigger premium, and agent pay usually grows with the size of the policy. So ask how the number was built, line by line.

Check the number again every few years, and after big changes like a new child, a new house, a paid off mortgage or retirement. Coverage, cost and eligibility depend on underwriting and health, and any guarantee in a policy depends on the claims paying ability of the insurer that issues it.

Related

Is ten times your income enough life insurance?

Sometimes, but only by luck. Ten times income is a rough starting guess that ignores your debts, your kids' ages, your savings and any coverage you already have. Adding up the real needs and subtracting what you already have gives a number built for your family.

Do I need life insurance after retirement?

Many people need much less, or none. The common reasons that remain are a surviving spouse's income when one Social Security check stops, evening out an inheritance between children, a debt that would land on someone else, and final expenses.

Should I count my life insurance through work?

Count it while you have it, but know it usually ends when you leave the job or retire. Group coverage is often only one or two times salary, and carrying it with you, where allowed, usually costs more.

Do Social Security survivor benefits reduce how much life insurance I need?

They can. Survivor benefits may be paid to a surviving spouse and to children under 18, and they can cover part of the lost income. Your own estimate is on your Social Security statement at ssa.gov.

Where this fits.

This question sits inside a bigger one. Life Insurance walks through the whole decision rather than this one piece of it.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.

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