How much life insurance do you need?

To figure out how much life insurance you need, add up what your family would have to cover without your income — the years of salary they’d replace, your outstanding debts, childcare, college and final expenses. Subtract what you’ve already saved and any coverage you have through work. What’s left is the amount to buy.

That number is what keeps the mortgage paid and your kids in the same house for as long as they need it.

Most people land somewhere between $500,000 and $2 million. A 30-year-old with two toddlers is replacing two decades of salary and lands near the top of that range. A 55-year-old with grown kids and a paid-off mortgage lands near the bottom.

Get an accurate number before you shop

• Count every year your family depends on you, not just the years until your kids turn 18. If college is ahead, your mortgage runs to 2045, or your spouse retires in 15 years, count those years too.
• Use tomorrow’s prices for future costs. Tuition and childcare rise faster than general inflation, so a college figure based on today’s rates will come up short.
• Subtract your work policy, but don’t build around it. Most employers cover one year of your salary, and that coverage ends when you leave the job.
• Include a non-earning spouse. Replacing childcare, driving and household work runs $250,000 to $500,000 in coverage even with no salary to replace.
• Recheck the number every three to five years, or after a move, a baby or a raise.

How much life insurance should you buy?

The right amount of life insurance is different for everyone. How much coverage you should get depends on how much you earn, how many people rely on your income, what you owe, what you’ve saved, and what you want to cover in the future.

A common starting point is 10 to 15 times your annual income. But that number can shift significantly depending on your situation. A single person with no dependents and no debt needs far less than a parent of three with a mortgage and 15 years left until retirement.

“Focusing on any one aspect of an individual’s financial life can create problems.” says Michael Snowdon,a personal financial counselor at Magellan Federal.

How to calculate the coverage you need

Working through your own numbers gives you an amount tied to what your family would actually have to replace, rather than a multiple of your salary.

• Add up what you owe. Your mortgage balance, car loans, private student loans and any debt someone co-signed for.
• Multiply your income by the years your family would need it. Count the years until your youngest is independent or your spouse reaches retirement, whichever comes later.
• Add future costs you’ve planned for. Remaining tuition, a child’s wedding, or care for an aging parent.
• Subtract what you already have. Savings, retirement accounts your family could access, and any coverage through your employer.

What’s left is your coverage amount. Employer coverage is worth counting but not leaning on — group policies usually cap at one or two times your salary and end when the job does.

What the calculation looks like for one family

Say you’re 38, earning $85,000, with two kids at home, $240,000 left on the mortgage and $30,000 in savings. Working through the list gets you to just over $1.1 million, or about 13 times your income.

You’d be replacing 10 years of income, enough to carry your kids to the point where they’re not dependent on it. A family with younger kids or a spouse who isn’t working would replace more years and land higher.

Signs you may not have enough life insurance

As your life changes, your coverage needs to keep up with it. If any of the following apply, your current policy is likely falling short.

• You’ve had a child or taken on a dependent. Every new dependent adds years of income replacement, childcare and education costs to your coverage needs.
• Your income has increased. If you’re earning significantly more than when you bought your policy, your family’s standard of living has risen with it. Your coverage hasn’t.
• You’ve taken on new debt. A new mortgage, car loan or business debt that your family couldn’t cover without your income needs to be factored in.
• You’re relying only on employer coverage. Employer policies typically cover 1x your salary. That won’t cover a mortgage, dependents and years of lost income.
• Your policy is more than five years old. A policy you bought before marriage, kids or a home purchase was written for a different life.

When should you update your life insurance coverage?

You should update your life insurance any time your financial responsibilities change. What your family would need if you died tomorrow is different than it was when you first bought the policy, and the amount you locked in then may be too low now — or more than you still need.

• You get married. You’re now responsible for a shared financial life, joint debts and potentially a dependent spouse.
• You get divorced. Remove your ex-spouse as beneficiary and reassess how much coverage your dependents actually need.
• You have a child. Each child adds 18-plus years of financial dependency to your coverage calculation.
• You buy a home. Your mortgage is a debt your family inherits if you die before it’s paid off.
• Your income goes up significantly. Your family’s cost of living has risen with it, and your coverage needs to match.
• Someone starts depending on you financially. A parent or relative you support counts as a dependent.
• You start a business. Business debts and obligations can fall to your estate or co-signers.
• You approach retirement. Once debts are paid and dependents are financially independent, you may need less coverage than before.

How to get enough life insurance without overpaying

The cheapest policy isn’t always the best one, but you don’t need to overpay to get solid coverage. These steps will get you to the right amount at the right price.

• Buy term life for temporary needs. Term life insurance (coverage that lasts a set number of years) is significantly cheaper than whole life and covers most people’s core needs: income replacement, mortgage payoff and raising children. A 20- or 30-year term policy bought in your 30s is the most cost-effective option for the majority of families.
• Buy sooner rather than later. Premiums are based on your age and health at the time you apply. A policy bought at 30 costs a fraction of the same coverage bought at 45.
• Factor in your employer coverage, but don’t rely on it. Use your workplace policy as a base, not a plan. It disappears the moment you change jobs.
• Compare at least three insurers before committing. Premiums for identical coverage can vary by hundreds of dollars a year across insurers. Get quotes from at least three before deciding.
• Reassess every three to five years. As debts shrink and savings grow, your coverage needs change. Overpaying for coverage you no longer need is just as much a mistake as being underinsured.

“Many people will think they can’t afford coverage based on sticker shock. You have to look at the figure again to determine what is necessary and make your adjustments,” adds Snowdon.

How much does life insurance cost?

A healthy 35-year-old woman pays $496 a year for $1 million of 20-year term coverage, and a man the same age pays $607. Waiting until 45 raises that to $1,025 for a woman and $1,337 for a man.

Your rate is set by your age on the day you apply and holds for the full term. Buying at 30 instead of 40 saves a woman $266 a year on the same $1 million policy, and she pays that lower rate every year for 20 years.

The table below shows average annual premiums for a nonsmoker in preferred health on a 20-year term policy.

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