Partner content: This content was created by a business partner of Dow Jones and researched and written independently of the MarketWatch newsroom. Links in this article may result in us earning a commission. Learn More
Once you decide you want to buy life insurance, the next question you should ask is “How much life insurance do I need?” Since life insurance needs are different for each person, we at the MarketWatch Guides Team compiled information to help you decide on the best life insurance and how much life insurance you need.
Life insurance is a policy agreement between you and your life insurance company. As long as your premiums are current, your beneficiary can collect a lump sum when you pass away. This is referred to as a death benefit. Life insurance coverage provides peace of mind to your loved ones, and the payout can be used for things such as funeral expenses, college tuition or other financial obligations.
There are two basic types of life insurance: term life insurance and permanent life insurance. Your life insurance cost is based on things such as your age, the type of policy, the amount of coverage and the number of years you choose to be covered. Some life insurance plans also require you to have a medical exam or fill out a medical questionnaire.
While the amount will vary from person to person, the goal is to have enough life insurance to provide for your family members when you die. You do not want your loved ones to have to pay off your financial obligations without enough money to cover them.
How do you know how much life insurance will be enough? Examine these key factors to help answer that question.
When deciding on the minimum amount of coverage you need, add up the amount of money you owe. This includes any outstanding debts, such as mortgage payments, credit cards, student loans and car loans. While some debts might be forgiven by the borrower, such as federal student loans, your loved ones might still be obligated to pay taxes on the amount written off.
The more debt you have, the less money your loved ones will have for living expenses. Life insurance is a way to ensure your debt is paid and your family is taken care of for as long as needed.
If you have children or other people who depend on your annual income to pay for living expenses, purchasing the right amount of life insurance is important.
When deciding how much coverage you need, consider current expenses, such as childcare costs, and future expenses, such as college costs. The younger your dependents, the more life insurance you need. Your dependents might qualify for Social Security survivor benefits, but since this is a small amount, life insurance is still needed.
Buying a life insurance policy that provides enough coverage is essential if you are a wage earner, especially the primary one. Your coverage should be enough to replace your annual salary to help your loved ones manage day-to-day living expenses and alleviate the burden on them for as long as needed.
Remember to add more to compensate for inflation. A good rule of thumb is to purchase 10 times the amount of your annual income in coverage, but each situation is different. If you are young, think about purchasing 20 to 30 times your salary, especially if you have dependents that will need support.
Life insurance is considered necessary if you would have an expense, such as funeral costs or debt, that cannot easily be covered by your savings or your loved ones when you die. You are never too young or too old to benefit from life insurance products.
The younger and healthier you are when you begin the policy, the lower the life insurance premium will be. That rate is locked in, so as long as your premiums are paid on time, the policy cannot be canceled and the cost will not increase even as you get older.
Dependents are covered under different types of life insurance policies called dependent life insurance, which means you can obtain a life insurance policy for your child at a lower fixed rate that continues into adulthood. When they are older, you might be able to transfer the policy to them, which can provide a helpful start to their financial future, especially if you purchase a whole life insurance policy that accumulates cash value.
If you are an older adult and your children are grown, you might not need as much life insurance as when you were younger. As you pay off debt and think about retiring, reevaluate your life insurance needs. Remember, too, that your premiums are higher if you begin a policy when you are older, so the sooner you can secure life insurance, the better. Depending on your life insurance company, there might be a cutoff age to begin a policy, so check into that if you are over 65.
You might also want to explore the best no-exam life insurance policies, especially if you have health issues. You still need to answer the questions about your health honestly — while some of the policies might be more expensive, there are a few options available so you can find the best one for your needs.
If your financial situation changes and you need to cash out your permanent life insurance policy, explore your options with your financial advisor. While this is an option, there could be penalties and taxes that you will need to pay. Cash value life insurance, also called whole or universal life insurance, earns interest on a portion of the premium paid, so you might be able to borrow or withdraw money without the need to surrender the policy.
Typically, it is better to hold onto your life insurance policy to get the most financial benefit and to ensure you leave enough money for your loved ones.
How much life insurance do you need? The specific amount is different for each person who asks the question. However, the basic answer is the same: You need to have enough to cover your end-of-life expenses, debt and other obligations. Life insurance is meant to give you and your loved ones peace of mind knowing that they will be taken care of during a difficult time in their lives. To find the best life insurance policy for you, we recommend getting quotes from at least three different providers before making a selection.
The rule of thumb is the younger you are, the more life insurance you need, especially if you have a mortgage, credit card debt and other outstanding debt, or if you provide financial support to someone else.
Due to lower life insurance rates for younger people, it is recommended to buy a life insurance policy as soon as possible. If you think you can’t afford it, look for cheap life insurance or consider a term life insurance policy. The cost is lower, and you’ll get more death benefits for your money.
Due to lower life insurance rates for younger people, it is recommended to buy a life insurance policy as soon as possible. If you think you can’t afford it, look for cheap life insurance or consider a term life insurance policy. The cost is lower, and you’ll get more death benefits for your money.
The best life insurance policy depends on your financial needs. Term life insurance policies cost less, but they do not accumulate cash value. On the other hand, a whole life insurance policy combines a death benefit with a tax-deferred savings account, but it can cost about six times more than a term life policy. If you are looking for an investment, choose the best whole life insurance policy that fits your financial plan.
Everyone’s insurance needs are different, so a life insurance calculator is a great way to figure out how much coverage you need. You can also manually add up your debt, including your mortgage, the cost of education for your dependents and the amount of money needed for other expenses until your dependents can support themselves.
Our goal at the MarketWatch GuidesTeam is to provide you with comprehensive, unbiased recommendations you can trust. To rate and rank life insurance companies, we created a thorough methodology and analyzed each company by combing through online policy information, speaking to agents via phone, reading customer reviews for insight into the typical customer experience, and reviewing third-party financial reliability scores.
After collecting this data, we scored each company in the following categories: coverage, riders, availability and ease of use and brand trust. To learn more, read our full life insurance methodology for reviewing and scoring providers.
Bradford Cuthrell is a meticulous researcher and writer specializing in pet and home finance topics. He’s surveyed thousands of pet owners and homeowners, listened to hundreds of customer service calls from various home service companies and spoken with dozens of industry experts to understand homeowners’ common pain points and needs. When he’s not helping his readers make informed decisions, he’s reading a book a week, planning a camping trip or working on his novel draft.
Sabrina Lopez is an editor with over six years of experience writing and editing digital content with a particular focus on home services, home products and personal finance. When she is not working on articles to help consumers make informed decisions, Sabrina enjoys creative writing and spending time with her family and their two parrots.
Copyright © 2023 MarketWatch, Inc. All rights reserved.
By using this site you agree to the
Subscriber Agreement & Terms of Use, Privacy Notice, and Cookie Notice.
Find the best [category]