Life Insurance Calculator: How Much Life Insurance Do I Need?

What Is Life Insurance and Why Do I Need It?

Life insurance is a type of contract in which the policyholder pays an ongoing premium in exchange for a death benefit that is paid out to one or more beneficiaries when the policyholder passes away.

It’s an important part of any adult’s financial plan because life insurance provides your family with money to relieve stress during an already difficult time. For instance, a life insurance death benefit can pay for one-time expenses like burial costs and outstanding medical bills. But it can also cover lost income after the death of a working spouse, or extra household and childcare expenses if a non-employed spouse passes away first.

No matter how old you are or how much you earn, nearly everyone needs life insurance. Having the right policy in place can make a huge difference in the financial health of your loved ones in the event you pass away sooner than expected.

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How to Use Our Life Insurance Calculator

Using a “how much life insurance do I need” calculator lets you customize the death benefit amount based on your personal situation. Before you jump in, gather a few pieces of information to get the most accurate estimate for coverage and premium costs.

• Annual income

• Outstanding debt

• Years of income to replace

• Funeral and burial costs

• Existing savings and life insurance

It’s also smart to re-evaluate these categories every few years to make sure your coverage needs haven’t changed. For instance, you may have more kids or buy a more expensive house. Those updates should be reflected in your life insurance coverage.

Key Factors for Determining How Much Life Insurance You Need

Here’s how each of the factors above can impact the amount of life insurance you need for your family.

Annual Income

The amount you earn each year affects how much life insurance you should get, especially if you have a family that relies on your income. And if your job is taking care of kids and the general household, calculate how much it would cost to outsource childcare and household tasks. After all, a working parent will need to pay for all of those additional costs if a stay-at-home parent passes away.

One way to estimate a portion of coverage is to add up all of your debt and upcoming expenses. But another method is to multiply your annual income by 10. That would allow your family to save or invest the lump sum and at least partially live off the interest or capital gains

Outstanding Debt

Getting enough coverage to pay off outstanding debt can provide your family with peace of mind in the future. Instead of having all of the same bills as a one-income household, they’ll be able to pay off any auto loans, mortgages, student loans, credit card balances, and personal loans.

As you add up all of those outstanding balances, you may be surprised at the total, both on a monthly and annual basis. Enabling your family to pay off those balances with a life insurance benefit gives them a much stronger financial foundation. That’s especially true when you can’t predict all of their future needs, like potential medical expenses or other financial emergencies.

Years of Income Replacement

Your policy amount also depends on how long you want to replace your income. This number varies with each individual because your circumstances will be different. If you aren’t married and don’t have children, you may not worry about leaving a substantial death benefit that’s meant to replace your income for years to come.

But if you do have a spouse and kids, there are several variables to think about. For instance, how much does your spouse earn and how long would you like them to be able to live off your existing income? Until retirement? Until the kids move out?

You should also consider the age of your children. Providing enough income to get them through their college years can lift a major financial burden off the entire family. And if you have more kids in the future, you may want an additional policy that resets the clock on how long your coverage lasts, especially if you choose term life insurance

Funeral and Burial Costs

Everyone needs a plan in place to cover their final expenses, no matter what your family situation may be. If you don’t have immediate family members to cover those costs, the money will be distributed from your estate, which includes any assets you have at the time of death.

No matter who’s in charge of your estate when you die, it’s important to plan for funeral, burial, or cremation costs because they can add up quickly regardless of what method you choose. In 2023, the average price of a viewing and burial funeral was $8,300 and $6,280 for cremation, according to the National Funeral Directors Association.

Explore your local average costs for your preferred method to incorporate into your life insurance calculator. That way, no matter who arranges your final requests, they’ll have the budget to carry out your wishes.

Existing Saving and Life Insurance

You may not need such a large life insurance policy if you have substantial savings or some life insurance in place already. For instance, if you have a well-funded retirement account that your spouse could tap into, you may not need to replace as many years of income.

Or if you’re adding an extra policy because you had another kid, you can include that policy amount to put towards your new calculation. Just remember to consider how many extra years’ worth of expenses you’ll need when accounting for a new child.

Recommended: Glossary of Life Insurance Terms

The Takeaway

A life insurance calculator like this one from SoFi can help you understand what size policy you need to leave your loved ones on firm financial footing after you pass away. The tool also lets you customize the death benefit amount based on factors like your annual income, outstanding debt, years of income to replace, funeral and burial costs, and existing savings and life insurance policies.

FAQ

What’s the main difference between term life and whole life insurance?

A term life insurance calculator shows more affordable coverage because your policy only lasts for a set period of time, usually between 10 and 30 years. A whole life insurance calculator, on the other hand, provides coverage estimates for your entire lifetime. It’s more expensive, but your policy lasts as long as you pay your premium. There also may be a cash value component in case you want to tap into those funds throughout your lifetime.

How does my health affect my life insurance premium?

A life insurance premium calculator asks questions about your age, height, weight, and health history. This is because pre-existing conditions or family history could impact potential life span. The fewer issues in your medical history, the less you’ll likely pay in premiums.

Can I change my life insurance policy after I buy it?

It’s possible to change your life insurance policy after you buy it. If you surrender an existing policy, you may have to pay penalty fees. You may, however, be able to negotiate the terms of your policy with your existing provider. Or you can search either entirely new policies or get a smaller one to add to your current coverage.

Is the death benefit from life insurance taxable to my beneficiaries?

No, life insurance policy proceeds typically aren’t taxable and don’t need to be reported to the IRS. But you may need to report any earned interest from the death benefit.

What happens if I stop paying my life insurance premiums?

Your insurance company will stop providing coverage if you don’t pay your life insurance premiums. If you have a term life policy, coverage will completely end. If you have a permanent policy, you may have access to any cash savings that was part of the contract. But your beneficiary won’t receive the death benefit if you pass away during a lapsed policy.