How Much Life Insurance Do I Need For My Family?

Updated: Apr 23, 2021

A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value - the amount your policy pays if you die - depends on a few different factors and as such, the minimum amount of coverage you need may be quite different what someone else requires. Financial experts often recommend purchasing 10 to 15 times your annual income in coverage, though your personal number may be higher or lower. Here are some of the most important considerations for choosing a minimum amount of life insurance.

How much life insurance do i need for my family?


Life insurance can be used to pay off outstanding debts, including student loans, car loans, mortgages, credit cards and personal loans. If you have any of these debts, your policy should include enough coverage to pay them off in full. So, if you have a $200,000 mortgage and a $4,000 car loan, for instance, you need at least $204,000 in your policy to cover your debts. But do not forget the interest. You should take out a little more to settle any extra interest or charges as well.

Income Replacement

One of the biggest factors for life insurance is to replace income. If you are the sole provider for your dependents and bring in $40,000 a year, for example, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation.

To err on the safe side, assume that the lump sum payout of your policy is invested at 8%. You will need a $500,000 policy just to replace your income. This is not a set rule but adding your yearly income back into the policy ($500,000 + $40,000 = $540,000 in this case) is a fairly good guard against inflation. Once you determine the required face value of your insurance policy, you can start shopping around. There are many online insurance estimators that can help you determine how much insurance you will need.

Life insurance for professionals and families

Insuring Others

Obviously, there are other people in your life who are important to you, and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. The death of a child, while emotionally devastating, does not constitute a financial loss because children cost money to raise. The death of an income-earning spouse, however, does create a situation with both emotional and financial losses.

In that case, follow the income replacement calculation with his or her income. This also goes for business partners with whom you have a financial relationship. For example, consider someone with whom you have a shared responsibility for mortgage payments on a co-owned property. You may want to consider a policy for that person, as that person's death will have a big impact on your financial situation.

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