How Much Level Term Life Insurance Do You Need?

Should the unthinkable occur, how much level term life insurance does your family need?  Would $100,000 or $500,000 be enough to sustain their quality of life?  Do you need a $1,000,000 level term life insurance coverage?  Calculating the amount of death benefit your family needs means analyzing two core factors: your current salary and the time before you reach retirement age.

Salary and Retirement Age: Two Important Factors

Knowing how much coverage your family needs is an important part of obtaining an accurate level term life insurance rate.  In regards to your income, utilize your before-tax annual salary.  If you do not have a salary, perhaps because you are the stay-at-home parent caring for the children, then consider what your replacement income would be.  These figures would include survivors’ Social Security benefits, how much money you could earn in the marketplace, and the savings you currently have.

Then, calculate how many years you are away from retirement, and find the appropriate box in the table below that applies to your situation:

level term life insurance

Thus, for example, if you currently are 45 years old (thus 20 years from retirement) and earn $100,000 annually, you would need to purchase a $1.6 million-level term life insurance policy to ensure that your family can maintain the same standard of living, even if you pass away.

Of course, this is simply a rough estimate, and your family may actually need less or more than the table indicates.  There are several variables that may further impact how much level term life insurance you really need.

Do you have other sources of replacement income?

The estimated number from the table can be decreased if you have additional sources of replacement income.  There are several factors that can lower the amount of level term insurance you need:

  • Do you have investments that are generating annual returns?
  • How much income could your surviving spouse earn on his or her own?
  • How much money does your family currently have saved?
  • What other assets do you and your family own?

Each of these figures can reduce how much level term coverage you need.  For example, if your family has $150,000 in savings, then you could reduce your life insurance policy by that value.  Keep in mind that if you have replacement income, you would want to multiply that annual value by the years until your spouse’s retirement, and then you can roughly subtract that value from the suggested level term value.

What are your outstanding anticipated expenses upon death?

Simultaneously, there may be reasons why you would want to purchase additional term life insurance coverage than the table’s recommended value.  Although this may increase your level term life quote rate, the financial benefits can be tremendous for your family.  If you anticipate significant outstanding expenses upon your death, then it is important to adjust your level term policy accordingly:

  • What will your funeral expenses be?
  • How much will your estate’s legal fees, taxes, and administration cost?
  • How much is left on your family home’s mortgage?
  • How much debt, including car loans and credit cards, does your family hold?
  • How much would you like to allocate for an emergency fund for your family?

All of these expenses can add up quickly, and thus, you may want to consider increasing your life insurance policy’s benefit to account for these costs.  The difference may only be a few dollars a month in your level term life insurance, but the end result for your family’s financial stability will be tens, if not hundreds, of thousands.