How much life insurance do I need?

5 mins readLast updated October 4, 2023by Kate Morgan

In this guide, we look into how much life insurance you need and the factors that may affect your needed coverage levels. Learn more here.

Many Americans believe life insurance is as costly as health insurance. This is wrong. Many believe they don’t need life insurance until they’re older. This is also wrong.

When do you need life insurance?

In all, 30 per cent of Americans believe life insurance is only necessary for end-of-life expenses, but this is a misnomer.

Life insurance policies are cheaper to take out when you’re younger, and some policies could serve you much better (ever heard of income replacement or wealth transfer?) if you choose them in good time. 

As much as nobody likes to think about their death, doing so is essential, especially if you have a family or dependents who rely on you financially.

When you take the time to sort out your life insurance – at any age – you take the time to make sure your loved ones will be provided for financially when you’re gone, and will be able to pay the bills and cover the essentials without fear in an undoubtedly difficult time.  

How much life insurance should you have?

If you’ve accepted that you probably need to start looking into life insurance, the next question is usually “How much life insurance do I need?

The answer depends on several things, from your age to your income to your preferred policy type.

You must primarily work out what your dependents might need to cover after your death.

Ask yourself: 

  • Do I have any debts? – This includes student loans and mortgages. Your policy should cover the cost of paying them off, and because you might incur interest on your debts, it’s best to take out a little extra to ensure your dependents are fully covered. 

  • Am I my household’s main source of income? – A total of 44 per cent of US households would struggle financially if they lost their main source of income. If you are the main source of income in your household, your life insurance policy will need to replace your income (and rise above it to keep up with inflation). 

  • How will my funeral costs be covered? – In America, the average funeral costs over $7,000. If you don’t take out an insurance plan, investing money into mutual bonds, which accumulate value, should give you enough to pay for your funeral. Either way, it’s something to account for. 

When you have these answers, you have a good starting point: an idea of how much you would ideally want to leave behind.

From there, you can look at your finances and see what’s feasible, researching costs to narrow down your answer. (Considerations like your health, your family’s medical history and any of your outstanding debts will also impact how much your life insurance costs and therefore how much you can afford). 

How much does life insurance cost?

The most common type of life insurance sold in the US is a 20-year term of life insurance at $500,000. Under that policy, the average amount an adult pays is $26 a month.

Women generally pay less than men because they have a longer lifespan, approximately five extra years (though this evens out when you factor in health insurance, which tends to cost more for women). 

As with other types of insurance, the cost of life insurance increases as you age.

The following is a breakdown of the averages for different age groups. They’re also calculated based on a 20-year, $500,000 plan, but the results prove that it’s not as expensive as many think.

The average annual rates are: 

  • At age 30: 

    $224 for men 

    $189 for women 

  • At age 50: 

    $826 for men 

    $645 for women 

  • At age 70: 

    $9,297 for men 

    $8,204 for women 

Based on the same 20-year, $500,000 plan, a family of four pays, on average, $147 a month.

Between two adults who are both working and earning, that’s not as exclusive a price as many expect for quite comprehensive life insurance. 

Term life insurance or whole life insurance?

These are the two main types of life insurance in the US. Both have their pros and cons, and because term life policies are cheaper, they’re more accessible and more common.

Term life plans last for a specified amount of time – 20 years, for example. Many experts recommend them (especially if you’re a younger buyer) since they mean that your beneficiaries will receive larger death payouts, and they can be converted into whole-life policies at any time.  

That said, there are some drawbacks. You have to requalify at the end of every term, and the cost of your premium increases every time. Plus, the policy accumulates no cash value.

Finally, qualifying for term life insurance is challenging if you have a serious ongoing health issue.  

Whole life insurance doesn’t need to be renewed and lasts a lifetime, meaning the premiums never increase. Plus, the policy builds tax-free cash value, and you can withdraw money from it.

However, whole life insurance is more expensive and complicated, and it’s still possible that you’ll need to renegotiate the policy if your life and health needs change.

Plus, you’re charged interest on any loans you decide to take out against your policy. 

Working out how much you need mathematically

In 2022, the “need gap” for many families is double what it was in 2010. As this gap increases, so does the need to protect your family if the worst happens.

If you’re still wondering “How much life insurance should I have?” and you really want to get it right, consider the effective mathematical manner of working it out. 

Most experts suggest taking out a policy that covers 10 to 12 times your salary.

This should provide your family with a comfortable amount to cover the costs of all the essentials and bills.

Here’s what you need to do if, for example, you want to cover your family for 20 years: 

  • Multiply your annual salary by 20 

  • Add expenses like your mortgage, any debts, or any possible future college fees 

  • Subtract any savings from the figure (or maybe even your current life insurance policy) 

  • The amount you end up with is the amount of life insurance you should purchase 

Content writer

Kate Morgan

Kate has written for leading publications and blue chip companies over the last 20 years.