How Much Life Insurance Do I Need?

Sean McGinn is assistant director, product positioning at Northwestern Mutual.

How much life insurance you need is like your fingerprint—it’s unique to you. It depends on many factors that are specific to you and your situation. We’ll take you through how to get a general idea of how much life insurance you should have to protect your loved ones.  

Estimating how much life insurance you need

If you’re working, your employer may provide life insurance equal to only one or two years of your salary. But you might see advice online to get enough coverage to replace your salary for 10 years. While that’s a good general starting point for how much life insurance you need, the true amount of insurance you need depends on things like these:

• income
• age
• student loan or credit card debt
• mortgage(s) you have
• family members who rely on your income
• major goals throughout your life
• everyday expenses (boring but important)
• and more!

Though estimating based on a few important factors can get you close, it’s best to talk with a financial advisor instead of buying insurance based on your own “best guess.”

Your financial advisor will know the right questions to ask to help you get the right amount and the right type. After all, $100,000 might sound like enough for life insurance, but it may not be adequate to help your family and keep your money goals on track.

Decide what expenses you want to cover with life insurance  

As you determine the right amount of life insurance for you, it’s a good time to nail down your monthly budget. Your everyday expenses and big goals are important pieces of your multifaceted financial plan—which includes life insurance.

So it’s important to keep all your goals in view. Think about paying for your kids’ college or weddings, your retirement—and even big vacations. When you’re calculating how much you’d like to cover, make sure your advisor takes those big milestones into consideration along with ongoing costs like grocery bills.

As you can see, a thoughtful estimate of how much life insurance you need goes way beyond any general guideline. It involves a more complex, customized calculation than “Your current income times 10, plus 100K per child.”

Also important: Know that debt, like student loans or a mortgage, may need to be repaid immediately after your passing. Make sure your financial advisor includes those amounts when tallying up how much life insurance you need. 

Decide how long you want the money to last

If you’re 30 with a spouse and two kids, you have a lot of years to provide for your family. Think about leaving behind enough death benefit to get your spouse to age 65 or 70 (when they might retire). Or maybe your goal is more focused on getting the kids through school.

If you’re closer to 55, you have fewer years of income to protect and possibly more financial resources to provide for someone. But keep in mind that someone you leave behind may need money for the rest of their lifetime, even through retirement. 

You don’t necessarily need to know the actual dollar amount of your future earnings because your survivors will likely be able to make money by investing some of the death benefit or buying an annuity. But knowing how long you need the money to last can help you and your advisor to find the amount of insurance that you need.

Consider more than just the death benefit 

While the death benefit is the main reason you buy life insurance, permanent life insurance can have a number of uses during your life. The cash value of permanent life insurance can be an important part of your financial plan, providing flexibility for you down the road. With many policies, cash value is guaranteed never to go down in value over time, which can make it a very stable asset that’s easy to access.

Life insurance policies available today also aren’t just a “one-size-fits-all" solution. Now you can often customize them with optional riders, or small add-ons, that fit your situation. When designed properly to fit you and your family, life insurance can be a flexible financial tool that works alongside investments and other aspects of your money to reach your goals..

Think about your money overall

Here are a few other tips when deciding how much life insurance you need and selecting a policy:

• Don’t think about life insurance in a vacuum. You should look holistically at your financial big picture. For example, knowing you have some money in safe financial tools may allow you to take more risk with other parts of your money.
• Be generous with your loved ones. Remember, the person you choose as your beneficiary will get the money when you pass. Leave behind an amount that allows them to be comfortable while they are grieving.
• Regularly check in. Review your policy and your other financial tools at least once per year. Life can go by fast, and things can change. Make sure your policy keeps up.

Connect with an expert

When you’re ready to get serious about buying insurance, it’s a good idea to work with a financial advisor. An advisor can help you determine your needs and find the right policy for you.

A financial advisor can also take you through other financial considerations and reveal opportunities you might have overlooked. They can make recommendations on other parts of your financial plan, showing you how insurance and investments can work together to grow and protect your money.