How Much Life Insurance Do I Need?

Determining whether you need life insurance is easy. Unless you're nearing retirement and have a great deal of personal savings stowed away, your family needs some amount of protection.

However, determining exactly how much insurance to buy can be a complicated affair. While some experts insist that a life insurance policy equal to 10 times your annual income will be adequate to protect your family, your individual calculus may vary according to multiple factors.

In short, you will need more insurance if you are your household's sole earner, you have younger children that plan on attending college, or you have significant amounts of personal debt that your family will need to pay off upon your death. If you need guidance, use an online life insurance calculator.

First, Let's Talk About The Cost Of Death

If you plan to be buried, there are a variety of factors to consider. You will need a casket, among other things. The average price of a casket was about $2000 in 2012. A quick internet search brings up astonishing prices, including the “Mahogany Masterpiece” costs more than $17,000!

The funeral home typically has a lump-sum package that starts around 0. This price includes mortuary care, labor costs, and transportation costs. Things like weekend services, multi-day wakes, and open caskets cost extra. Memorial services in general can cost up to $4000, and cost more when they occur in churches since the minister and the church can require hourly payment and rent. It's also important not to forget fees such as the organist and tips.

Depending upon your religious preferences, embalming is an additional cost, usually around $200 - $700. This does not include washing, dressing, and cosmetically preparing the body and placing it into the casket.  This can cost an additional $95 - $400.
There are also costs associated with the burial itself. You will need a burial plot, which averages between $200 and $900.

Premium spots in some areas can even rise as high as $2000. These figures were for public cemeteries, however, and private plots are even pricier with averages around $2000 - $3000. Don't forget accessories: a lawn crypt is another $2000 - $12,000, and a grave marker starts at $250 - $600 for a flat one or $1000 - $3000 for an upright marker.

Beyond the direct costs of a funeral and burial, there are also other smaller costs to consider. Many people opt to choose floral arrangements, and a variety of online florists claiming to offer the best deals. You also will need to notify frienda and loved ones of the proceedings. Some newspapers charge flat fees and some charge by the line for obituaries. There are also thank you cards, announcements, booklets, and other things you may not have even considered

Of course, if you choose to go with cremation, it can cost as little as $800, minus the price of an urn. Urns can be brass, wood, or marble, and come in a variety of styles and prices. For example, a Colonial Clock Cherry Urn will run you $399.95 with free shipping.

As you choose the amount of life insurance that is right for you and your family, please consider the fees associated with your death. Relying on social security will not get you very far. They pay a one-time lump-sum death payment of $255, which will probably not even cover the cost of flowers.

Be Prepared to Consider Future Expenses

Before arriving at a final number, shoppers must consider their family's future expenses. Education is often the most burdensome of these: Putting even one child through college may cost upwards of $100,000 in today's dollars. Fixed costs like mortgages, car loans, and health insurance plans must be taken into account as well. Smaller but still-significant costs like fuel and utility bills shouldn't be overlooked.

If there are small children in the house, it may be unreasonable for a policyholder to expect their spouse to be able to work full-time and take care of the kids simultaneously. Policyholders with young dependents should increase their premiums to account for this additional loss of future income. In many cases, life insurance shoppers may benefit from using a third-party life insurance calculator.

How Can I Determine How Much Coverage I Need?

Depending upon the demographics of their clientele and their own personal opinions, financial advisers may recommend one of several formulas for determining adequate life insurance coverage. One of the simplest is the income-multiple formula: Using this technique, life insurance shoppers simply buy enough coverage to replace their pre-tax earnings for a specific number of years.

Some experts within the life insurance industry insist that eight to 10 years of income replacement is necessary. On the other hand, many financial advisers who advocate frugal living recommend purchasing coverage for just five to seven years and building up a nest egg on top of that.

However, these rules of thumb tend to overgeneralize. In order to avoid paying high premiums for coverage that they don't need or purchasing inadequate coverage to save on premium payments, life insurance shoppers should consider their individual needs before settling upon a specific policy.

Of particular importance are the potential policyholder's age and lifestyle choices. Relatively young life insurance shoppers who remain in good health may wish to purchase ample coverage while they can still afford to do so. As policyholders age, however, their rates rise dramatically.

Using an Insurance Calculator

You'll find life insurance calculators on most insurers' websites, as well as on third-party finance sites, like As opposed to quote generators, which request basic numerical information about your age, marital status, health and income, this interactive tool resembles a long-form questionnaire. You'll be asked to estimate your funeral costs, the future needs of your dependents, and whether you have school-age children who may go to college. When analyzing your responses, insurance calculators assume that the return on your policy's proceeds will grow as time goes on.

Remember that it is in the financial interest of any life insurance provider to encourage potential customers to purchase generous amounts of coverage. Life insurance calculators can provide clarity about the process of determining how much insurance you'll need, but don't be afraid to seek a second opinion.

An Alternate Approach

If you wish to bypass traditional insurance calculators, you can roughly estimate the amount of insurance that you'll need by lumping your future expenses  into four broad categories. These are your funeral costs, outstanding debts, your children's education expenses and your family's day-to-day living costs.

Although your exact figures may vary, finding values for each of these categories is a straightforward process. Depending upon where you live, the average cost of a funeral these days runs between $10,000 and $20,000. Your debt load includes current debts like your home and auto loans, credit cards balances, and any student loans remaining from your younger days. Your childrens' future college expenses may be harder to estimate, but you can make separate calculations for in-state and out-of-state public universities as well as more expensive private schools.

Finally, divide your yearly income by two to determine what your family will need to get by without you. If you worry about your spouse's ability to find work and support your children at the same time, increase this figure accordingly.

You May Be Less Covered Than You Think

Most Americans without a generous stash of retirement savings feel as if they lack adequate coverage. According to LIMRA, a leading advocacy group for the life insurance industry, the average American household owns enough life insurance to replace their income for 3.5 years. While this sounds like an adequate amount, LIMRA found that typical policyholders would prefer to increase their coverage to at least 6.8 times their annual income.