How Much Life Insurance Do I Need?

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If people depend on you financially, you probably need life insurance. But how much life insurance do you need?

You may remember Russell Crowe’s character delivering this line in the movie Gladiator: “Death smiles at us all. All a man can do is smile back.”

Securing an appropriate amount of life insurance may not give you the intestinal fortitude of a Roman gladiator. But as grisly as it sounds, everyone dies.

Knowing that the people who depend on you will be taken care of financially, no matter what happens to you, can be a source of comfort.

In this article, I’ll tell you how much life insurance you need, the potential obligations you want your life insurance policy to cover and some factors that may help you decide on a payout amount that’s right for you.


Table of Contents


How Much Life Insurance Do I Need According to Clark Howard?

Before you start calculating how much life insurance you need, take a moment to consider whether you need it at all.

Do you have any dependents? Or anyone else who counts on you financially? If not, you don’t need life insurance. Are you considering buying a life insurance policy on your child? Forget it.

Life insurance has one purpose: to replace your income for those who depend on it in case of your untimely death.

Now the important bit.

According to money expert Clark Howard, if you need life insurance, get a benefit equal to 10 times your gross annual salary. So if you make $60,000, Clark recommends buying a term life insurance policy with a $600,000 benefit.

Do I Really Need That Much Life Insurance?

Let’s take a second to acknowledge that life insurance benefit figures can seem like eye-popping numbers.

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If you make $75,000 a year, buying $750,000 worth of insurance may seem excessive at first glance. And it is a lot of money. But remember, you’re getting a life insurance policy to replace years, or potentially decades, of income.

Many term life insurance companies won’t offer policies with benefits smaller than $100,000. Often the potential options increase by $50,000 or even $100,000. So it’s generally one of the big-dollar types of insurance.

There’s a good reason for that. According to data from LIMRA, a worldwide research and consulting organization, 44% of families would suffer financially within six months if the primary breadwinner passed away. A full 28% of families would run into financial trouble within one month.

Let’s look at some specific financial obligations you may want to cover with a life insurance policy.


Financial Obligations You May Want Life Insurance To Cover

Want the “easy button” for figuring out how much life insurance you need? Clark’s rule, buying a life insurance policy with a benefit that’s 10 times your salary, is just what you need.

That strategy is like a one-size-fits-all glove. And Clark doesn’t know all the details of your life.

If you want an answer that more resembles a tailored suit, you should consider the financial obligations that you want to cover. Some potential options include:

  • Income replacement if you die before your planned retirement age
  • Unpaid mortgage obligations
  • Debts
  • College tuition for your children
  • Funeral and end-of-life expenses

It’s also important to consider your family’s expenses. If your family lives frugally and tries to one-up Clark when it comes to saving more and spending more and spending less, you may not need as much life insurance.

Now let’s paint a different picture. Say you have five children, a mortgage on a mansion and a giant monthly car loan payment. You pay Serena Williams to give your kids tennis lessons and you fly to Europe three times a year to visit your brother. You may need more coverage than the average person — that is, if you’d like your family to maintain that lifestyle after your death.

Consider Your Existing Assets

Since I’ve already gone to an extreme, let’s stay a while. Let’s say you’re 45 years old, you have $10 million in your 401(k), your house is paid off, you have a loaded 529 plan and you have a wife and one child.

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You’re in a position to self-insure and probably don’t need life insurance.

For most of us, our savings account, 529 plan and investments aren’t that flush. However, if you’re trying to determine how much life insurance you need, consider any assets you have that your dependents would be able to apply to the financial obligations that you want to take care of.

Consult With a Financial Expert

Still confused? Do you want to customize the amount to your life beyond multiplying your income by 10 but find it to be too much math?

Because life insurance is such an important part of your financial planning, it’s a good idea to consult with a financial advisor.

Just remember that Clark thinks you should work with fee-only fiduciaries.

Don’t have a financial advisor and don’t want to pay 1% of your assets just to decide how much life insurance to buy? Try the Garrett Planning Network. Their team of fee-only fiduciaries can help you on a short-term basis.


Factors That Can Impact How Much Life Insurance You Need

I’ve already mentioned some of the factors that can impact the size of the benefit you want. But let’s go deeper.

Here are a few more considerations:

  • Your age (and how many more years you expect to work before retiring)
  • The age of your children
  • The rest of your family’s after-tax income
  • The amount of money you expect to pay for your child’s education (Yale vs. a local community college)
  • How much income you expect to make during the rest of your career (perhaps you’re anticipating a career change, a big raise or cutting back your hours)
  • Potential changes in lifestyle (maybe your family would be OK spending less, or maybe you and your spouse plan to upgrade your lifestyle in a big way)
  • Your debt and any potential changes in those debts
  • Funeral and burial costs (are you planning to get cremated, or do you want your family to hire a second line for a New Orleans jazz funeral?)

Term Life Insurance vs. Whole Life Insurance

Term life versus whole life insurance is a debate for some people. But not for Clark. He’s adamant that the best term life insurance companies offer much better products for almost everyone than whole life insurance policies.

Term life insurance is simple. You pay steady, level monthly premiums for a set period of time. If you die within that time period, the insurance company pays an agreed-upon amount to your beneficiary.

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Universal life insurance is much more complicated. It includes an investment component that’s the opposite of straightforward. Insurance salespeople often rack up high commissions on universal life policies. But these policies do guarantee a payout no matter when you die.


How Long Should Your Term Life Insurance Policy Last?

The simplest answer is to figure out how many more years you plan to work and how long your dependents will need your income.

If you’re a single parent and your only child is 17 and headed to college on your dime, you probably don’t need a 20-year policy (and may not need a policy at all).

The most common term life insurance policies last 20-30 years. But remember, these policies exist to replace your income. If you plan to retire in five years, you don’t need a 20-year policy.

Say you have a 3-year-old daughter. You plan to pay for her college. You have 20 years left on your mortgage. And you don’t plan to retire for another 23 years. A policy of 25 or 30 years may make the most sense for you.

Now let’s imagine you’re married with no children. You and your spouse plan to retire in 15 years. You have 12 years left on your mortgage. A 15-year term life insurance policy may make the most sense.

Most people cancel their term life policies before reaching the end of the term. If you get to year 14 of a 20-year policy and find that you have all the money you need to meet your obligations, you can get out of your policy without much trouble.


Do Stay-At-Home Parents Need Life Insurance?

Let’s return to the idea that a life insurance policy exists to replace your income.

It’s a great catch-all statement. But it doesn’t account for the new expenses your family may incur if you’re a stay-at-home parent.

If you were to die while your child is still living at home, would your surviving spouse need to start paying for things such as childcare, lawn maintenance and cleaning the house? Would they need to start getting lunch delivered from DoorDash every day?

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Over 10 or 15 years, those are serious potential financial obligations to consider even if you’re working only part-time or not at all.


Final Thoughts

Securing 10 times your annual income in term life insurance is the simple, one-size-fits-all answer.

If you want to get more precise, consider which financial obligations you’d want to cover no matter what happens to you and whether you have any assets currently that could go toward paying for those obligations.

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