How to determine how much life insurance you need

 With COVID-19 still on the minds of anxious Americans, wondering if you have enough life insurance is hardly an extreme question. (iStock)

Do Americans have enough life insurance? It’s a question that few financial consumers might have asked before a global pandemic changed the world. But it's possible that more heads of household are asking that question now.

According to data from the Global Atlantic Financial Group, 83% of Americans said that "making sure their loved ones are financially protected is important to them right now." However, there's a big financial problem: 43% say they have no life insurance and just 33% believe "they have enough life insurance or other assets to protect their family in the event of their own death."

It's always important to shop around to determine which life insurance policy fits you best. Compare life insurance companies via the online marketplace Credible free of charge.

How to figure out how much life insurance you need

To accurately peg your life insurance requirements, you’ll need to understand what’s at stake – and know how to financially cover a scenario most people don’t want to think about. By completing the right life insurance calculation, you can make sure you have the right amount of coverage for your loved ones. 

Follow these steps to figure it out.

  1. Evaluate risk
  2. Know your human life value
  3. Calculate your life insurance needs
  4. Choose between term life and whole life insurance

1. Evaluate risk

To properly evaluate life insurance needs, you need to consider the following risks if you were gone – and your family is left to deal with the financial fallout.

  • Income replacement: Is anyone dependent on your income? If so, how long is there a need to cover that income? "For example, if you had an 8-year-old child, there may be a need for income replacement for a minimum of 10 years to provide funds for their upbringing until they reached the age of 18," said Daniel Kachani, principle at Aria Wealth Solutions Ltd., in Toronto, Canada.
  • Education planning: Do you want to provide a set amount of funds reserved for the purpose of post-secondary education for your children? "If so, calculate that sum into your insurance needs," Kachani noted.
  • Debt: Do you have any outstanding debt, like student loans, a mortgage, or other large debt amounts? Those figures need to be accounted for in any life insurance needs equation, too.
  • Final expenses: "You’ll likely need cash to cover costs related to a funeral," Kachani said.
  • Other expenses: "These expenses include personal specific interests a family might have, such as continuing to raise the family puppy or paying household bills," according to Kachani.

Want to know more about your potential risks? Credible's partners can walk you through the process to help you determine which life insurance policy suits your lifestyle.

2. Know your human life value

Your human life value is how an insurer evaluates how much coverage to offer. Basically, it’s your earning potential during your lifetime.

"This is a simple formula based on current earnings that are extrapolated," said Raquel Murphy, vice president of individual life insurance with HUB International Northeast in New York, N.Y. "If you have significant savings or wealth accumulation, that may offset the amount of life insurance you may need. Another consideration is your monthly expenses and what amount of your monthly income is required to maintain your household if you have a premature death."

Once you've calculated this, head to Credible to view life insurance companies and see what kind of offerings they have.


3. Calculate your life insurance needs

Your human life value is usually a multiple of your earnings.

"For someone age 30, for example, use a multiple of 20, or at age 40 use a multiple of 15," Murphy said. "For example, at age 40, multiply your annual income by 15. Assuming an annual income is $100,000 your human life value would be $1,500,000. This is the amount that you would have earned for your family had you been living and working until retirement age."

Credible's partners can also help you crunch these numbers. Click here to view your life insurance policy options.


4. Choose between term life and whole life insurance

Life insurance consumers also need to know the difference between term life and whole life insurance before making any big decisions based on life insurance needs.

For the vast majority of people, a term life insurance policy will be most suitable and affordable.

"Term life insurance offers a fixed death benefit with a fixed annual premium over a fixed term period of time; usually in 5, 10, 15, 20, and 30-year term increments," said Brian Boyd, managing partner at Boyd Wealth Management in Sacramento, California.

"Permanent (whole life) insurance can work well for high-net-worth families that anticipate needing the coverage for life," Boyd added. "Usually, they want life insurance to fulfill an estate planning or business succession need that won't go away over time."

"Just know that permanent life insurance has a much higher annual premium than term life insurance but can build a cash value that can be tapped if the policy is surrendered or borrowed from along the way," he said.


The takeaway on figuring out life insurance needs

Knowing how much life insurance you really need is a critical financial task, given the high stakes involved.

That’s why it’s a good idea to meet with a financial planner to determine your life insurance picture. And the sooner you do so, the better you’re likely to feel, knowing that your loved ones are protected.

As always, Credible's financial experts can help make the evaluation process simple. Learn more about life insurance here.

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at and your question might be answered by Credible in our Money Expert column.