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How much life insurance should you have?

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MoMo Productions/Getty Images

Life insurance is a gift you can leave behind to help protect your loved ones. Deciding to get coverage may be easy, but determining how much life insurance you should have is often challenging.

The answer depends on many factors. To help you start thinking about your needs, consider what you would want to happen if your income was gone. For example, your life insurance benefit can help cover your mortgage, pay off education, provide an income for your spouse and leave a legacy to the causes that matter most.

Speaking with your loved ones about your values and goals can help you determine the amount of life insurance you'll need. Here are the other key details to consider.

How much life insurance do you need?

There is no one-size-fits-all answer to this question, but a good rule of thumb for estimating how much life coverage you need is to multiply your salary by 10. However, you can get a more personalized number by using a life insurance calculator ahead of meeting with a financial advisor.

Most people view life insurance in terms of income. That's undoubtedly an essential part of the equation. But life insurance provides other benefits, too, including the chance to make a difference to the people and causes closest to your heart.

As you start to weigh out your insurance needs, consider these factors:

  • Your children. Your children's age and financial situation may help determine if you want temporary coverage to help pay for costs until they are grown or if you prefer to leave a more permanent legacy behind.

  • Your spouse. Many people choose a life insurance contract to help take care of their spouse. The life insurance contract's death benefit can help replace your income now and into retirement.

  • Loved ones with special needs. You may have a child or relative you care for who has special needs. Life insurance can help fund special needs trusts, ensuring they remain covered without disruption to government-funded assistance.

  • Your financial obligations. If you have credit card or home and auto debts that your spouse may struggle to pay without your income, you may want to consider having more coverage to help pay those off.

  • Leaving a legacy. Your life insurance death benefit is a good way to leave gifts to loved ones or plan a donation to organizations and charities near and dear to you.

  • Creating generational wealth. Life insurance's death benefit may be an option if you want to help build generational wealth for your loved ones.

  • Other factors. Don't forget to consider funeral costs, potential estate or inheritance taxes, or child care needs as you add up your various expenses.

Consider this decision time a unique opportunity to begin a discussion with your family. Thinking about your life and legacy—and listening to their needs and concerns—is an excellent start. These questions can help guide you during the conversation.

At a bare minimum, I’d recommend you cover 10 years of lost income. But it’s my obligation to share with clients what you need to have the lifestyle you want for your family.
John Estes, financial consultant with Thrivent

Tips for calculating your life insurance needs

Once you have a general idea of your situation and needs, you'll want to run the numbers. There are many ways to estimate your potential life insurance needs, from simply multiplying your current income by 10 to using the LIFE method (liabilities, income, final expenses and education).

“Many people don’t understand the human life value,” says John Estes, Thrivent financial consultant in Overland Park, Kansas. “Over the next 10 or 15 years, what would have been the total income of the spouse who died?

“At a bare minimum, I’d recommend you cover 10 years of lost income. But it’s my obligation to share with clients what you need to have the lifestyle you want for your family,” he says.

Start with Thrivent's life insurance calculator. Here's how to approach using this calculator and some key inputs to consider.

Your household income

One of the first numbers you may want to consider in your calculations is your current income. Think about what your family may need to cover your lost income or how they would replace it if they didn't receive a death benefit from your life insurance. If your spouse is a stay-at-home parent, they may have a more difficult time replacing your income compared to a spouse who makes a comfortable salary. Accordingly, you may need coverage to replace your income until your spouse qualifies for Social Security. That calculation differs from providing an income for the rest of their lives.

When calculating your ideal amount, also include your spouse's current earnings and potential Social Security benefits. They also may qualify for Social Security survivor benefits. So those are two other numbers to consider as you run the numbers.

Your assets & investments

Include your assets in your life insurance calculator, too. Cash and savings, your home's equity and other investments can help cover expenses.

You may want less coverage if you have a significant amount of assets. But if you want to avoid making your loved ones dip into retirement savings or your home's equity to cover expenses, you may want to increase your life insurance amount.

Your debt & expenses

Knowing your income is only part of the equation. One helpful approach to remembering everything else you should consider is the LIFE method life insurance equation. It stands for liabilities, income, final expenses and education—all factors to include in your life insurance needs.

Beyond providing income, your death benefit can help your loved ones cover short-term needs for significant expenses such as your mortgage or educational costs. It also can be used for smaller debts and expenses, like credit card bills.

You'll also want to think about future expenses. For instance, if you have children, include lifestyle expenses beyond food and childcare, such as clothing, medical needs and entertainment for the time they'll still be under your care. If you don't have children to care for, consider various lifestyle expenses for your spouse

As you're adding your debt and expenses to the calculator, don't forget to include the costs of your funeral and burial, any unpaid medical debts, estimated probate costs and taxes. These can unexpectedly add up, so having a ballpark idea of these expenses can help you get a more accurate baseline number.

The legacy you want to leave

Leaving a legacy is important for many. That may mean leaving small monetary gifts to your grandchildren or a lasting donation to your church or favorite non-profit. If using your life insurance to leave something positive behind is essential to you, include those gifts in your calculations.

When you determine how much you need, we’ll talk about how to fund it—term, permanent or a combination—in a way that fits into your budget.
John Estes, financial consultant with Thrivent

Types of life insurance coverage available to you

Once you've calculated your initial needs, consider the two primary types of life insurance coverage: term and permanent. Each has advantages and disadvantages. The option that will work best for you depends on your unique situation.

“The first goal is to determine what you need, and it could be a high amount,” Estes says. “Then when you determine how much you need, we’ll talk about how to fund it—term, permanent or a combination—in a way that fits into your budget.”

Term life insurance

Term life insurance covers you for a set period, such as 20 years. If you pass during the specified term, your insurer will pay a death benefit to your beneficiary (as long as your premiums are paid). This type of life insurance can make sense if you're young or have children at home.

  • Advantage: Term coverage is typically the most affordable type of life insurance.
  • Disadvantage: Term life insurance will expire after the specified period and does not build cash value to be used for other needs during your life.

Permanent life insurance

Permanent life insurance, such as whole life insurance, lasts your entire life. You don't need to worry about the contract lapsing during your lifetime (as long as premiums are paid and the contract retains its value). Whole life insurance also offers the potential to build cash valuea living benefit of this type of contract—which may be accessed throughout your lifetime. This type of life insurance may make sense if you'd like to use the other benefits of life insurance while you're living, or leave a legacy to family or charitable causes.

  • Advantage: Some types of permanent life insurance builds cash value over time through a savings component.
  • Disadvantage: Permanent coverage is typically more expensive than term life insurance.

Choosing between term and permanent life insurance

As you choose your contract type, reviewing your budget and determining the coverage you can afford makes sense. Keep in mind that purchasing permanent coverage typically gets more expensive as you age, so there may be some trade-offs to consider. Regardless of your choice, you'll want to be confident you can cover the premiums today.

On the other hand, if you choose a term contract and decide you would like to change it to a permanent contract down the road, a term to perm contract conversion option may be available. Check with your financial advisor to see if your contract offers a term conversion option.

Make the best choice for your family

Thinking about life insurance can be uncomfortable. But, most important is feeling satisfied you have enough coverage to care for your people and communities after you're gone. In a time of great stress and emotional turmoil for your loved ones, this is a gift you can pass on to ease some of their burdens and leave a legacy.

One person who can help you work through the financial aspects of these decisions and determine the best path for your family is a financial advisor. They can bring some clarity to the process, helping you identify the correct amount of life insurance protection to meet your needs.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration