How much life insurance do you need?

What's your life worth?
What's your life worth?   

Life insurance is rarely a topic that consumers like to think about, talk about—or even do anything about for that matter. Recent statistics show ownership of life insurance policies is at the lowest level in decades: One in four consumers have no life insurance at all. One of the biggest problems is many consumers simply have no idea how much life insurance they need or the best place to get it.

So, who needs insurance?

Simply put: If you have anyone in your life who depends on you financially, you need life insurance. While many Americans get life insurance policies through their job, the coverage is usually lower than individual policies and is only in place while they're employed. Fewer than half of Americans between the ages of 25 and 64 with annual household incomes between $35,000 and $100,000 have their own life insurance policies, according to new data released by the insurance industry group LIMRA. In its survey, most consumers said they were not financially prepared for the death of a family member and would need to make a drastic or significant financial change if that occurred.

So how much insurance is enough? Some experts say you should have enough life insurance to cover five to 10 times your annual income (especially if you have a young family), but often that's just a guess. The answer really depends on how much money your family and/or dependents will need after you're gone.

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Senior couple financial planning
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There are three key steps to take to determine the amount of life insurance that is right for you:

Evaluate your family's needs. How much money does it take to run your household? Do you have unpaid medical bills, a mortgage balance and/or outstanding debts? Don't forget to add funeral expenses and possible estate taxes to the mix. Life insurance policies can pay immediate expenses, including medical costs, as well as funeral bills, taxes, mortgage payments and other debts. The equivalent of all of that will get you close to the amount of life insurance you may need.

Consider future financial obligations. You should also have enough coverage to pay for future financial obligations. If you intend to help pay for college for your kids, say, factor in pending tuition bill and fees as well. Outline your family's cash-flow needs as well as financial goals. Add it all up to figure out the estimated amount of money that your survivors would need.

Tally up the resources. Now look at the money that would be available. What is your spouse's income? Do you have long- and/or short-term savings? Add up the balances in your 401(k)s, IRAs, 529 college savings plan, emergency reserves and estimated Social Security survivor benefits, as well as any existing life insurance policies (perhaps through your employer).

The difference between your family's financial needs and the available resources will tell you how much life insurance to get. You can also use the "Life Insurance Needs" calculator at to help you crunch the numbers.

Keep in mind that life insurance can also make sense for anyone who wants a reliable source of income for their heirs, though you may not need life insurance for your entire life. Couples with sufficient assets to care for themselves and for their family may opt out of paying premiums. Empy-nesters whose children are self-sufficient or those with small estates who won't have to pay state or federal estate taxes, advisors say, are also less likely to need life insurance right away.

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