Buying life insurance can seem overwhelming. If you have a family or if you provide financial support for anyone, you probably need life insurance. The question of how much life insurance you should buy to provide your loved ones with enough money to cover your outstanding debt in the event of your untimely death is fairly straightforward. However, figuring out how much life insurance you need to provide for your loved ones’ financial futures may be a confusing process.

It’s a form of predicting the future, and most of us aren’t very good at that. There are a few tried-and-true guidelines you can use to decide exactly how much life insurance you should buy to pay off any debts and provide for your family’s future.

How to come up with a number

For a wage-earning adult, having enough life insurance to provide for the future of your family while covering any outstanding debts and paying for funeral and burial costs is a good goal.

Of course, you can only make an estimate of the gap between your assets and financial obligations when you include future income loss.

If you have children, calculate the number of years between now and when the youngest graduates from high school. Take your yearly income times that number. This is the minimum amount of life insurance you should buy.

Add your outstanding debts, an estimate of how much it will cost to educate your children between now and when they graduate from college, and your funeral and burial costs.

Keep in mind that income and expenses will increase over the years. Purchase more life insurance than you think you’ll need just to be safe. It may seem like a good idea to get multiple life insurance policies in smaller amounts to help build in flexibility. However, most insurance companies will allow reduction of face value if a smaller policy meets your needs years from now.

If you want term insurance and are young and healthy, it’s best to choose a longer term. The policy premiums will be slightly higher but purchasing a life insurance policy when you are nearing retirement age can be prohibitively expensive. It’s better to take on the small increase in cost now in exchange for adequate coverage later.

1. Future earnings

Replacement of income is important if you need a life insurance policy to provide for dependents after your death.

In most cases, it’s safe to calculate a policy payout that can replace income for as many years as your dependents would have needed you to provide for them in life (until your kids are grown up and out of the house). Most people buy 7 to 10 years of their income as a minimum.

For stay-at-home parents and caregivers, this calculation is just as important, but it can be tricky. Try to figure out how much it would cost to hire a nanny and housekeeper for two years and at least plan to cover that cost with the life insurance policy.

2. Debt

Debts held jointly, or with a cosigner, will become the sole responsibility of the living party, regardless of their ability to pay.

So it’s important to make sure that the life insurance policy easily covers any outstanding debts. Be sure to include mortgages, credit card balances, car loans, personal loans, student loans, and any other outstanding bills. It’s also crucial to include any outstanding loans or mortgages that have a cosigner or are jointly held.

When a person dies, their money can be used to pay outstanding bills. If the amount they owe is less than the amount of money they had on hand, their estate is considered “solvent” and any leftover funds will go to the deceased person’s beneficiaries or heirs at law if they didn’t have an estate plan.

If there isn’t enough money to cover debts, the estate is labeled insolvent. Any money available will go toward paying off debt held in the deceased person’s name and will be applied according to state law. In this case, the beneficiaries of the estate get nothing, and they aren’t responsible for handling unpaid debt.

3. Funeral and burial costs

If you have enough money to cover the cost of a funeral and burial expenses, those costs will be paid before other debts.

There are three things that families must pay for after a death. While costs vary widely, an average funeral in America costs around $10,000. There will be costs associated with the funeral home’s services, the cemetery, and the grave marker or headstone.

If your family doesn’t have several thousand dollars to spend on a funeral, make sure you add that amount to your total life insurance coverage.

4. Other expenses

While other expenses like future education costs of dependents and medical bills can be difficult to estimate, it’s still important to account for those costs. Think carefully about these factors as you go through major life changes.

When a baby is born or adopted, when you marry or divorce, or if you have a family history of certain types of illnesses, your situation may require an increase in the amount of life insurance you need.

Stay-at-home parents

Many families underestimate the need to buy life insurance for a stay-at-home parent. While there may not be income to replace, in the event of that parent’s death, the other parent will need to continue to work.

A stay-at-home parent brings economic value to a home, even if they don’t bring in a paycheck. Estimate how much it will cost per year to hire people to care for the children while the other parent works.

Paying off debts like a mortgage, outstanding car loans, and credit cards may be advantageous. Consider the costs of a nanny or babysitter and housekeeper, as well. Don’t forget to add in the costs of a burial and funeral for a stay-at-home parent. These costs can financially devastate a family that isn’t properly insured.

Life insurance for children

When families put life insurance in place for parents, they often wonder if they should also purchase policies for their children. In general, life insurance for healthy kids is inexpensive. Since children don’t typically contribute to the income of a household, there’s no need to purchase life insurance for any amount above funeral and burial costs.

Adding to an existing life insurance policy

As interest rates and inflation change, you may find that you need more insurance to compensate. For growing families, increasing the total amount of life insurance may be necessary.

Every few years, go through this process again to consider new financial developments. As your family’s dependence on you decreases and your savings balance increases, you may also find that you need less life insurance over time.

If you decide to add more life insurance to your existing policy, you may need to have a medical exam. The insurance company will ask for personal information about your occupation and health condition.

When seeking life insurance, it’s important to be completely honest throughout the underwriting process. While misrepresenting facts may reduce your premium in the short term, it exposes your beneficiaries to the possibility that their claim will be denied by the insurance company upon your death.

In short…

The most important thing to remember when calculating the amount of life insurance you need for yourself and for your loved ones is that the number doesn’t represent the relationship.

How much life insurance you need is completely dependent on your debts, how much money your loved ones would have immediately available to them in the event of your death, and how much income you need to replace. It’s smart to consider other expenses like funeral and burial arrangements as a courtesy to your family and friends.

The amount of life insurance you buy is a very personal decision, but taking the time to consider it carefully is an act of loving kindness.