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How Much Life Insurance Do You Really Need? A Step-by-Step Calculation

Writer's picture: Thomas, Harrison & Associates Insurance AgencyThomas, Harrison & Associates Insurance Agency
How Much Life Insurance Do You Really Need?

Determining how much life insurance you need is crucial for ensuring financial security for your family. It’s not just about replacing income; it’s also about accounting for future expenses, outstanding debts, and other financial obligations. At Thomas, Harrison & Associates Insurance Agency in Daphne, Alabama, we take a comprehensive approach to help you calculate the right amount of coverage.


Adjust life insurance for inflation

Here’s a step-by-step process to assess your life insurance needs:


1. Estimate Your Annual Income Replacement

Your primary goal with life insurance is likely to replace lost income for your beneficiaries. A standard recommendation is to purchase a policy that covers 7-10 times your annual salary. This helps ensure your loved ones can maintain their lifestyle for several years after your passing. If you're the primary earner, this step becomes even more critical.



Example: If you earn $75,000 annually, a policy between $525,000 and $750,000 may be appropriate just for income replacement.


2. Calculate Your Outstanding Debts

Next, assess your current debts. This includes your mortgage, car loans, credit card debt, and any other significant financial liabilities. The goal here is to leave your family without the burden of repaying these debts in your absence.


Example: If your mortgage balance is $250,000 and you have $50,000 in other debts, your life insurance coverage should include at least $300,000 to cover these obligations.


3. Consider Future Expenses

Think about major future expenses, such as your children’s education, weddings, or healthcare for aging parents. Including these costs in your policy can provide long-term security for your loved ones.


Example: College costs for a child can average $100,000-$200,000. If you have two children, adding $200,000-$400,000 to your policy ensures their education is covered.


4. Account for End-of-Life Expenses

Funeral costs can be higher than expected, often ranging from $8,000 to $15,000. It's important to factor these expenses into your policy to relieve your family of financial pressure during an already difficult time.


5. Adjust for Inflation

Adjust life insurance for inflation

Don’t forget that the value of money decreases over time. A death benefit that seems sufficient today may not hold the same value 20 years from now. Consider adding inflation protection or choosing a policy that allows for growth over time.


6. Subtract Existing Assets

Finally, subtract any assets that your beneficiaries can use, such as savings, retirement accounts, or other investments. This ensures your life insurance policy covers only what’s necessary.




Secure Your Future Today with Life Insurance from Thomas Harrison

At Thomas, Harrison & Associates, we specialize in customizing life insurance policies that align with your specific financial needs. Contact us today to start planning for your family’s future with confidence.


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