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Home » Life Insurance

Life Insurance: How Much Coverage do I Need, if Any?

Last updated by on 22 Comments

Do I Need Life Insurance?

Life insurance isn’t one of those warm and fuzzy topics that everyone loves to address. Making and investing money can be incredibly exciting. Creating a plan to protect your loved one’s finances in the event that you pass away – not so thrilling, yet it is extremely important. The good news is that you may already have it for free through your employer, and even if you don’t, you may not even need it at all.

People that Don’t Need Life Insurance:

    • Those with zero dependents: If you’re single with zero children and nobody depends on your income, then you have no need to be insured.
    • Children: Unless you were Macaulay Culkin’s parents in the early 90′s, you’re probably not dependent on your child’s income, so there is no reason to purchase life insurance on a child.
    • Retired folks: If your only income is generated from money that you’ve already earned, you no longer need to insure against income that will be lost if you die. In retirement you’re living off income that is already earned, or income that will be generated from itself, not you.

do I need life insurance

People that Do Need Life Insurance:

  • Those with a mortgage or other large debts: Good and bad debt included, your loved ones should be covered completely through life insurance to be able to cover all of your debts.
  • Those with children: If you have a loved one who is dependent on your income to help pay for your children’s schooling or are a single parent, consider taking out a policy to cover the future expense of your children’s college education.
  • Those with other non-children dependents: This could include a partner, family member, or someone else who is dependent on your income, or will be dependent on your income in the future. Worth lumping into this category are those with a spouse or other partner who would not be able to invest in their retirement without your income. Many times people are only able to save for their retirement when they are able to combine the power of two incomes. If one income vanishes from the equation, will your dependent still be able to save on their own?

I Do Need Life Insurance. Now what?

If you have determined that you do need life insurance, you’ll next need to determine how much you’ll need. One thing to keep in mind as you are running the math is that life insurance payouts are in after-tax dollars (meaning you don’t pay tax on them). Let’s figure out what you may need to cover:

  • Funeral expenses
  • End of life expenses (medical, primarily)
  • Mortgage debt
  • All other debts – vehicle, student loans, credit, etc.
  • Living expenses to ensure your dependents can live comfortably
  • Potential future education expenses for dependents

Next, you’ll need to determine how many years of your income your dependents will be reliable on you for if you were to pass away today.

Life Insurance Calculators:

Yahoo has a good life insurance calculator life insurance calculator.

Or, for a basic estimate, here’s a general table to assist you:

life insurance calculator

So Now I Know I need Life Insurance and how Much I Need, Now what?

The first thing you should do is check to see how much life insurance you currently have. Your employer may currently cover you already, albeit, often times not to the amount that you really need.

Later this week, we’ll discuss what kind of life insurance you should look to get.

Now that you know a little more about life insurance, for what reasons do you think you will or won’t need life insurance?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


22 Comments »
  • stephanie says:

    Thanks for this post! I am 23, single, have no dependents, and am not in debt, so I see no reason for me to have life insurance. However, my employer offers it free automatically upon hire, so I do currently have some life insurance. I probably would not take it upon myself to purchase it in the future if I switch jobs, and it is good to know that with my current situation that’s probably not a problem.

  • G.E. Miller says:

    @ Stephanie – Sounds like you’re in a great situation with no debt at age 23. That just warms my heart. Yeah, you have no need for life insurance, and anything your employer gives you is just icing on the cake.

  • Trevor says:

    I recently (within the last 6 months) bought life insurance. I figured it was about time since I do have debt, albeit mostly good debt (mortgages). And really how would my wife and daughter get along financially without me?

    I ended up getting a 20 year term life policy at a decent rate. I think a good follow up post to this would be to explain the differences in policies.

  • G.E. Miller says:

    It’s coming later this week Trevor. Didn’t want to pack too much into one post.

  • Trevor says:

    Great minds think alike.

  • Jim says:

    Term is the way to go. It appears that everything else is a ripoff. Whole life policies with cash value take the cash value when you kick the bucket. I took the cash value out and bought term insurance. Used the extra cash to pay down my debt.

  • G.E. Miller says:

    @ltr – great value add, thanks.

  • ltr says:

    Good post. A common rule of thumb used to determine the amount of life insurance required to replace income would be an amount equal to six, or eight, times annual gross income. This may or may not be the right amount for any family particularly if there are young dependents. Another factor is the amount of annual gross income that derived from unearned income. The impact on lost wages does not affect the unearned portion of income. However, if there is any debt associated with the investments that are supplying the unearned income portion of cash flow, those debts should be factored into the equation of need.

  • wingz says:

    Stephanie is in a good situation. But i do not agree that someone single, have no debt nor dependents don’t need life insurance.

    Life insurance come in handy a lot when planning for future retirement and family protection for those in Stephanie’s situation.

    e.g. Funeral expenses will be paid by their parents. and leaving without giving your parents anything for the love and time they shared with you and adding a little more expenses for them to handle? how would you feel when u look down from heaven seeing them crying over you? Parents wont mind. But what about you?

    Another e.g. if accidents or illnesses were to happen to you, do u have 100k for surgery? if no, who is the one whom is going to pay for that?

    What about disability? if you are disabled, who is going to take care of you? do you know the expenses your parents would need for to pay for you every month? Like i said before… your parents wont mind. But what about u?

    These are just my opinion. Please voice out if i said anything wrong.

    thanks,
    wingz

  • Do i Need Life Insurance? says:

    I’m 23 too, and i’m gonna married soon. So i interested in this theme. How you think do we really need life insurance?

  • Elzu Beth says:

    I think nowadays every people need life insurance. You have describe very well which people need or which people don’t need but I think in the recent age all the people needed for life insurance. I most liked your word that if you go with life insurance “Living expenses to ensure your dependents can live comfortably”. It is nice post.

    Thanks

  • andrew j says:

    A 25 year old vs. 30 year old buying a 30-year term life insurance means that the 25 year old will be quoted less premium than that of the 30 year old. At the end of the 30 year term, the 25 year old would be 55 and the 30 year old would be 60. The main key here is that both individuals should have made the appropriate investment plans (i.e. Mutual funds at 10% annual growth and complete debt elimination programs) within the 30 years so that by the time the policy is outlived, there is no more need for life insurance. The individuals have already reached financial independence. No more debt to pass on to family members. And all mutual funds/savings/investments the individual made would then be considered as the money to be passed down if the individual does die. When you’re young, you have high debt and you need life insurance in case you die. When you get older, youre debt is paid off, thus no need for life insurance. Buy term, and invest the difference. :-)

  • stephanie says:

    @ wingz:

    Personally, I don’t believe in afterlife, and don’t care what happens to my body when I die – preferably it will be donated to science, so funeral expenses should be minimal. Anything my family decides to do in terms of funeral services or memorial services will be for their own sake, not mine, and I do not feel obligated to fund that (though my life insurance that is included in my benefits through my work will pay $15k – I would rather that money go to starting Roth IRAs for my 2 younger brothers, but that decision will be left up to them).

    I also have excellent health insurance (I work on a college campus, so I have great benefits all-around), so I don’t think I need quite $100k saved up for medical emergencies. I am working on building up a substantial emergency fund, though, and I expect it to increase rapidly after I go to grad school.

    And finally, if I am disabled and unable to take care of myself, I think I would rather die, thank you. Yes, I am that independent-minded, I do not want to take, take, take from anyone (my parents included) nor be dependent on someone else so that I can complete my day-to-day routine. And for the record, I do also have long-term disability insurance through my employer, also. It is included in my benefits package, I don’t pay extra for it. I still think I would rather die than have to depend on others, even if I can be collecting from my disability insurance.

    I’m not saying that you don’t bring up valid points, but I personally 1. refuse to be dependent on others and 2. don’t feel obligated to pay for the decisions my family makes without taking my wishes into consideration.

  • ragnar3113 says:

    Now I have heard of this buy term and invest the difference concept before, before the market lost 36.2 percent of its value. So now I am wondering how those mutual funds are doing for you now? Recently I invest in a concept called SLIRP which over the next 18 years I pay in 55,000 and take out a cash value of 165,000 almost all of which is tax free. All while having coverage of approx. 250,000 in death coverage. However I mainly did it for the 165k in cash, which in order to get 165k out of my 401k I would have to have a value of 235,000 assuming a 30% tax rate which I am sure will increase by the time I retire since historically we are the lowest tax percentage in years.
    Another idea which I have discovered is lets say you had 100,000 in the market and you lost only 30% this year that means you now have 70,000 left. You would need returns of 10% for 4 straight years just to get back where you started. Meanwhile I know the 5 percent return on my SLIRP wasn’t sexy at least I am still up.

  • Tracy says:

    Do you have to have good credit in order to get approved for term life insurance? I am a 37 year old male, and I have a mortgage with four children and a wife. I have never had any type of life insurance. Should I consider getting life insurance?

  • Michael says:

    anyone wants sound advice just ask i will leave another comment.

  • Jimmy says:

    i am 47 years old, recently bought a house in Juneau, Alaska. I work for the state as engineer and i have both medical and life insurance. Someone approached me to get another life insurance for my house. In case something happens to me, my relatives can sell or continue the payment of the house. Is it necessary?

  • Mark@LifeInsuranceQuotes.net says:

    Only buy life insurance if you need it.

    1. Are getting married.
    2. Buying a new house.
    3. Having or just had children.
    4. Don’t already have enough life savings in the bank/401k.
    5. If possible, buy it through your employer.
    6. Can pay the premiums every month – a majority of term policy holders stop paying in the first year.

  • Matt K says:

    It is absolutely untrue that you do not need life insurance as a retired person. I don’t know how you come to that conclusion.

    Let me explain why you’re wrong…

    Estate planning!!!

    If you die and you have a spouse, did you know you lose the smaller of the social security benefits? Hmmmm lose of income, of by the way the surviving spouse has to deal with a huge loss income, inflation, and rising health care costs for the rest of his or her life…

    Life insurance can pay for Long term care cost for the surviving spouse, in home care, and health care costs, the children or friends do not have to take out a second mortgage to pay for care…

    One the biggest reasons to have some type of insurance as a retired person is protection from taxes…..

    This was completely left out FROM the “advice” given in this post. Pay taxes with TAX FREE MONEY!!! These are very real taxes you need to be aware of 1. Estate taxes
    2. IRD taxes, taxes on unspent qualified money 3. Inheritance tax 3. Death tax in some cases

    Life insurance can help pay for taxes and keep that burden off of the recipients of the a old 401k, IRA, Roth IRA or any qualified money not spent. The recipients have to pay taxes on that money at THEIR tax rate!!! If they are named beneficiaries on those IRA’s they can do a stretch IRA.

    If you want to create a legacy for your children or donate money…

    What about final expenses…. Almost 15000 just to put someone in the ground…

    What about legal fees to create a trust or pay a lawyer if they die… do you want to use their hard earned money to pay those fees, so the kids end up with nothing???

    That just the surface……

  • Tony says:

    I’m 25 and my wife is 24, we just signed up for ROP(Retrun of Premium) policies. I have a $500,00 policy, and she has a $250,000 policy.

  • g says:

    Never get one for student loans. Screw sallie mae they dont deserve to get paid.

  • Tom says:

    FYI, the forbes life insurance calculator link is dead now.

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