How much life insurance you should have is a highly personal question - it depends not just on your financial situation today, but also how you expect your finances and lifestyle to evolve in the future, your family’s goals and what your loved ones would do if something happened to you.
We built our interactive Life Insurance Guide’s calculator to make it easy for clients to feel confident about the right answer to, “How Much Life Insurance Coverage Do I Need?”
At a high level, you need enough life insurance to make your loved ones financially just as well off as if you were still alive. The trauma of losing you far too soon can never be fully mitigated, but there is a lot you can do to make sure everyone would ultimately be alright (and appreciative of your having laid the groundwork).
Whether it’s the income you earn or the care you provide for free (or both), you need to have enough life insurance that your surviving loved ones could continue living lives you are happy providing for them.
The “Range of Reasonable” Life Insurance Coverage
As with many things in life, there’s not one right answer. There is a “range of reasonable” for each person, and you get to decide where in that range you want to be.
On the low end, it’s the amount of money your loved ones would need to cover “the essentials”, the things you’d be heartbroken if they had to give them up were you gone too soon. Perhaps it’s remaining in your home or being able to keep them at the schools they currently attend.
In the middle of the range, it’s the essentials plus some nice-to-haves: a bit extra to cover things like therapy or extra childcare, or paying for 100% of college or helping with grad school.
On the high end, it’s all of that plus - as one of our clients put it - “amazing trips and birthday parties to cope with my not being there!”
I usually recommend that people choose where in the range they want to be based on pricing.
How Much Life Insurance Coverage You Need Will Change Over Time
It’s also a good idea to revisit your life insurance coverage amount if your household’s income changes by any meaningful amount, or every 5 years at minimum. Your life insurance coverage range will shift over time, and revisiting this ensures you’re never putting your loved ones at risk or paying for something you no longer need. (We explain why here.)
If you want to find out our suggested coverage amount for you, check out our interactive Life Insurance Guide. We can also help you adjust the calculation to reflect your situation and goals - just ping one of our experts on chat when you’re there.
Getting Your Life Insurance Coverage Right
If you die while you have life insurance, your surviving loved ones will receive a check for the coverage amount. That life insurance money will need to last long enough to pay for the things you want your surviving loved ones to have. Keep in mind that for the vast majority of people, your loved ones will not owe any taxes on your life insurance. (The nitty gritty of life insurance taxation is for another post.)
We’ll save the details of the math for another post (my fellow math nerds & finance geeks should check that out!), but the basic idea is that your loved ones will need a certain amount of money for a certain number of years, and the life insurance check needs to be big enough to cover that - your life insurance money must not run out too soon for your loved ones.
Here’s an overview of the main things you should think about covering:
+ Income you’d replace for the number of years your loved ones need It
+ Debt you’d want your loved ones to pay off
+ Kids’ college (a contribution, not necessarily 100%)
+ Any additional inheritance you’d want to leave (0 is fine, too)
- A portion of your existing savings
- Life insurance you already have and want to keep
= Your life insurance coverage amount
Some things to keep in mind:
- Any surviving spouse will still need retirement savings.
- Sometimes you should replace your existing coverage, sometimes you should keep it. The right answer always comes down to whether you can improve on what you have in the market today. (We can run that analysis for you. Spoiler alert: most people can do better than any workplace coverage they might pay for individually, and you should assume the coverage your employer pays for would not follow you to your next job.)
Finding Your “Range of Reasonable” Life Insurance Coverage
So where does your “range of reasonable” come from? The inputs in the calculation. (Not to worry, our interactive Life Insurance Guide will start you off with reasonable assumptions for most people, then you’ll have a chance to adjust them if you’d like.)
You might decide that replacing 80% of your income feels comfortable, replacing a bit more would leave room for “extras” like helping kids with grad school, and replacing a bit less would allow everyone to stay in the home you just bought in a good district, but might require some household expense-cutting if you were gone anytime soon. Anywhere in that range is a reasonable choice, it’s just a question of what you value.
Your goals and plans influence the right coverage amount for you. Even people who are in very similar situations today can come up with different coverage numbers if they have different plans for what would happen if they died early.
Our interactive Life Insurance Guide is designed to make it transparent and easy to figure out what coverage amount would allow your loved ones to stay on track in life if something happened to you.
Still want more detail? Check out A Deep DIve on AboveBoard’s Life Insurance Coverage Calculator (written for my fellow math & finance nerds, and anyone else who wants the nitty gritty).