Life insurance Calculator: How Much Coverage Do You Need?

An easy way to figure out your coverage needs is to use this life insurance calculator. Enter your annual income and how many years your dependents will need financial support, your debt, future college costs, funeral needs, savings and any other life insurance coverage—and you’ll get a result immediately.

How to Use Our Insurance Calculator

A good estimate of life insurance needs requires using a formula that includes your future financial obligations and your assets, such as savings, that your loved ones can use if you die.

To find out how much life insurance you may need, follow the steps below and our life insurance calculator will do the rest.

Enter your annual income and how many years of income you want to cover. We multiply your annual income by the number of years your loved ones will need that salary.

Enter your debts and future costs you want to cover. To do this, determine how much you owe or anticipate owing for the following financial obligations, such as mortgage, credit card debt, loans, future educational cost and funeral expenses.

Enter your savings and any current life insurance coverage. Now we want to subtract the assets your family would use if you passed away, like funds in a savings account, a retirement plan or another life insurance policy.

Results. When you use our life insurance calculator, a results page will provide an estimate of your life insurance needs along with details of what you entered.

Example of How the Insurance Calculator Works

Tips for Calculating How Much Life Insurance You Need

Keep these tips in mind when deciding your life insurance needs:

  • Tip No. 1: Figure out the type of life insurance you need, such as term life insurance or permanent life insurance.
  • Tip No. 2: Take into account other life insurance policies, like life insurance from your employer.
  • Tip No. 3: consider other life insurance benefits you might want to consider a life insurance rider, which is an optional add-on to a policy for additional coverage. For example, you can customize a policy with a long-term care rider, waiver of premium rider or accelerated death benefit rider.

How to Manually Calculate How Much Life Insurance You Need

Besides using the life insurance needs calculator, there are other ways to estimate how much life insurance you need. Here are four options.

  • Option 1: Multiply your annual income by 10. This is the easiest way to to get an estimate, but this method could leave you underinsured because it doesn’t take into account factors like debts, a mortgage and future education needs of children.
  • Option 2: Multiply your annual income by more than 10. Simply multiplying your annual income by a rather random number doesn’t account for your individual situation and anticipated needs and existing assets.
  • Option 3: 10 times income plus $100,000 for college. If you have children with future college needs, you could multiply your income by 10 and tack on $100,000 to pay for college. But this also falls short of being a reliable method for calculating how much life insurance you need.
  • Option 4: The DIME method. The DIME (Debt and final expenses; Income; Mortgage; Education) method includes more life insurance factors than simply multiplying your income and provides a rough estimate, but it doesn’t take into account savings and child care costs.

Compare Life Insurance Companies

Once you know your life insurance needs, you can start shopping for a policy. Compare life insurance quotes from multiple companies to see which ones offer you the best price.

Life insurance rates vary from company to company, so comparing quotes online or working with an independent life insurance agent can help you find the best life insurance rates for your age and health.

Is Life Insurance Taxable?

Is a Life Insurance Payout Taxable?

Life insurance death benefit payouts are usually not taxable. That means beneficiaries will receive the money without a tax burden hanging over their heads.

However, there are certain situations where a life insurance death benefit may be taxable. Here’s a look at when to prepare for a tax bill.

You are a life insurance beneficiary who receives interest on a death benefit

Most life insurance payouts are made in one lump sum right after the death of the insured person. But if a beneficiary chooses to delay the payout or take the payout in installments, interest may accrue. In that case, the interest paid to the beneficiary may be taxed.

The life insurance payout goes into a taxable estate

Most life insurance payouts are made tax-free directly to life insurance beneficiaries. But if a beneficiary was not named, or is already deceased, where does the life insurance death benefit go? It goes into the estate of the insured person and can be taxable along with the rest of the estate.

This could create a significant tax bill, especially considering both federal and state estate taxes may be applied. While federal estate taxes will not tax the first $12.06 million per individual as of 2022, state estate taxes can have significantly lower exemption levels.

Another possible unhappy scenario is that an estate is below the exemption level but a large life insurance payout to the estate pushes it above the exemption threshold into taxable territory.

This is avoidable by naming both primary and contingent life insurance beneficiaries and keeping those selections up to date.

The life insurance policy involves three different people

Life insurance death benefits can become a taxable gift in a situation where three people serve three different roles in connection with the life insurance policy. The positions include:

  • The policyowner. This is the person who purchased the policy and is ultimately responsible for paying the premiums.
  • The insured. This person’s life is covered by the life insurance policy.
  • And The beneficiary. This person receives the death benefit when the insured person dies.

For example, say a husband purchases a life insurance policy for his wife, and their son will be paid the death benefit. Suppose the wife (the insured) dies and the son (the beneficiary) receives the death benefit. In that case, the IRS considers the life insurance payout a gift from the husband (the policyowner) to the son. This is sometimes referred to as the “Goodman triangle” or “Goodman rule,” named after a decades-old court case regarding this issue (Goodman v. Commissioner of the IRS).

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