Knowing how much life insurance you need depends on multiple factors, including your age, your family status, your current income, and your health, among other realities. You'll also need a good hand on your estimated household debt on a monthly or an annual basis.

Pulling all of those factors together and working with a trusted insurance or financial adviser can get you a good estimate of how much life insurance you need, at any point in your life.

No doubt, knowing how much life insurance you need, and then acting on that knowledge, is highly advisable.

Life insurance can protect loved ones in the event of the policyholder's death. If life insurance was not in that picture, or if it's not enough coverage, families could be left with a host of devastating bills and a bleak household financial outlook.

That's a situation that can be reversed with life insurance, especially if you have a good grip on how much life insurance you need.

What Is Life Insurance?

Life insurance stands among long-term investing, home ownership and credit health as the staples of lifelong personal financial priorities. Most Americans get that fact, as approximately 60% of U.S. adults were covered by life insurance in 2018, according to industry statistics 

In a word, life insurance represents a contract between an individual (i.e., the policyholder) and an insurance company. In that contract, the policyholder makes regular payments to the insurance company in exchange for a lump-sum payment by the life insurer to the policyholder's beneficiaries upon the death of that policyholder.

Life insurance payments are made to beneficiaries immediately after the insured's death, and are paid out on a lump-sum basis, with no income taxes taken out of the payment. The amount of life insurance needed to adequately compensate the insured's beneficiaries can vary, depending on the policyholder's financial situation and the financial needs of the beneficiaries.

Term Life Insurance Versus Universal Life Insurance

Life insurance consumers should make financial decisions based on the two types of life insurance available - term life insurance versus permanent (or universal) life insurance. Here's a breakdown of each one:

Term Life Insurance

This life insurance model offers a life insurance customer financial protection for a fixed period of time, like 10 or 20 years. During that time period, the policyholder makes regular payments (monthly, semi-annually and annually are the most common consumer payment time frames). If, in that time, the policyholder dies, the life insurance company pays out to the beneficiaries based on the policy amount (say, $500,000 or $1 million.)

Term insurance customers often use the policies to protect against income loss at critical times in a policyholder's life, like after buying a new home, or sending the kids off to college. In those scenarios, term insurance payments can cover those costs in the event the policyholder is no longer around.

If the policyholder is still alive after the term policy period is over, the life insurance company usually offers continued coverage, although likely at a higher insurance rate, given the older age of the policyholder - which the insured is under no obligation to accept.

In general, though, term insurance, since it's built on a fixed time platform, is usually less expensive than universal life insurance.

Universal Life Insurance

This type of life insurance provides the policyholder with either long-term or lifelong insurance coverage, which also means that universal life insurance will cost more than term insurance, as the coverage period can easily go for 20 or 30 years, or longer.

Where term insurance conditions are largely fixed, universal life policies are fairly flexible, allowing the policyholder to tweak and adjust his or her insurance coverage in the course of their lifetimes, dependent on how their personal financial scenario changes over the years.

Another form of longer-term insurance is whole life insurance, which largely mirrors universal life insurance policies. With both types of insurance, policy terms are fixed, as the policy covers the insured for a lifetime, with no exceptions. Both universal and whole life insurance payouts are exempt from income taxes.

How Much Life Insurance Do You Really Need?

To get your life insurance coverage campaign up and running, take the following action steps:

Understand how life insurance companies figure out costs. Obviously, life insurance companies have financial skin in the life insurance coverage game. On a broader scale, they set the table for any consumer conversation on costs using a variety of actuarial tools, such as rate classes, risk-related issues, and demographics. Insurers break those categories down when actually calculating life insurance costs. Specifically, life insurance rates are set by a variety of personal consumer factors, including the policyholder's health (most insurers insist on a medical exam), the policyholder's family medical history, lifestyle issues (whether or not you're a smoker and if you get enough exercise, for example.) If you are a smoker, or you're living a sedentary lifestyle, expect to pay more for life insurance.

Once you understand how life insurance companies operate, cost-wise, and know what factors they use in setting premium rates, you can estimate how much life insurance you really need.

Start by factoring in your beneficiary's needs, coupled with your annual estimated income (more on that in a moment.)

You'll want your total life insurance payout to cover your income and cover those larger debts. The idea is to add up your estimated annual income and your total household debts (think mortgage, college, auto, and any outliers like personal loans or home equity loans.)

Add them all up on an annual basis and the resulting number will let you know, in approximate terms, where you stand and what you need in life insurance coverage to financially protect your family.

For instance, let's say you have the following annual income and debt levels:

Annual income/salary (net) = $75,000

Total $75,000

Annual household debt

Home mortgage = $15,000

Auto Loan = $4,000

College loans = $3,000

Outliers/bills = $3,000

Total household debts = $25,000

Using those calculations, you'll need your life insurance policy to payout about $100,000 annually to keep up with household income and expenses.

Figure out your life insurance coverage number. One formula that has gained traction in financial advisory circles is taking your annual income/salary, add in the amount of existing household debt, and multiplying it by a specific number. The number you can use may range from 10 or 20 times your total salary, income and debt, and it depends on your personal financial situation.

This formula is useful in getting a "ballpark figure" on life insurance coverage.

For example, let's once again say you earn $75,000 annually and you want to wind up in the $1 million life insurance coverage range. Let's also say that you have about $25,000 in annual household debt, as noted above. Thus, you'll need to cover about $100,000 yearly in life insurance protection, over a period of years.

Using this formula, you multiply that 100,000 by 10 and wind up with a figure of 1,000,000 - that means you need about $1 million to cover your expenses to cover your family's financial needs over the 10-year period after your death.

If you're in the same annual income and debt range (again, $75,000, plus $25,000 in annual debt), and you multiply by 15, (i.e., 100,000 x 15), you'll wind up at $1.5 million. That's the amount of money you'll need for your family to be in good financial standing for approximately 15 years following your death.

Use this formula as a "rule of thumb" exercise, and feel free to add or subtract your calculation numbers as you see fit. By and large, though, you can get a good roundhouse life insurance coverage using this formula.

A caveat here - this isn't an exact science, but by using the information above, you can gain a rough estimate of your needed life insurance coverage needs.

Consult With an Expert

As always, it's strongly advised that you consult with a trusted financial adviser, insurance professional, or estate planning professional to come up with a unique life insurance plan that works for you and your family.

When you do, bring your life insurance coverage estimates using the formulas listed above - that will get you started in the right direction when you're figuring out how much life insurance you really need.

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