Reader Question: How Much Life Insurance Do I Need?

I got three different questions recently related to this issue:

How much life insurance do I need?

This is a question that vexes many of us at some time or another. And, as with so many other personal finance questions, the answer is…personal. How much life insurance you need depends on the requirement that will be placed on your significant other after you die. I’m not a financial professional, and you can get a better idea of what you need by going to a financial planner that charges an hourly rate for services (not someone who gets a commission for selling you insurance) to work out your coverage needs and options. But here are some things to consider when trying to decide how much life insurance you need:

  1. How much does your spouse make? If s/he makes a decent amount, the requirement to replace your income won’t be as large. If your spouse can get by on what s/he makes, you won’t need as much coverage. If your family relies almost entirely on your earnings, you will need more life insurance coverage in order to replace that income so that your family is taken care of.
  2. Do you have savings? The more you have in savings, the less your partner will need when you pass on. Figure up your assets, and what your partner can tap into as part of the equation.
  3. Do you have debt? It is generally a good idea to have enough coverage to pay down any debt you have. Including the mortgage, if possible. This way, your partner can be free of obligations, and end up with fewer costs when you are gone, making it easier to provide.
  4. Do you plan to pay for college? Depending on whether or not you plan to cover college costs for your children, your life insurance policy should cover that. Another option is to get life insurance enough to cover a monthly contribution to a 529 plan, from now until your child turns 18.
  5. What are your living expenses? Consider living expenses, from utilities to clothing to childcare. Consider the increases in costs for childcare and other items if one partner ides. You want your life insurance to supply the difference.

You can get a basic idea with the help of of a life insurance calculator. I found that my life insurance coverage is adequate to my family’s needs. I have a policy on me that will pay off my mortgage, car loan and the rest of my student loans, as well as have extra to go in for a small amount of childcare for my school-aged son — if needed. (My husband says he’d probably move nearer to his parents if I died so that they could help.) We expect that our son will pay his tuition through scholarships and contributions to his 529 (with a little help from an ill-advised child life insurance policy on him), so there is a little to help with that. Since I am the primary breadwinner, and I can do my job from home without the need for childcare, coverage on my husband is much less than for me. We just have enough on him to pay off the student loans and car loan so that I don’t have to worry about consumer debt. (I can handle the mortgage, easy, until I sell the house.)

In the end, it’s all about evaluating your needs and making a decision based on what is likely to work best for your family.