Here’s How to Figure Out How Much Insurance You Need

Let’s face it, life is uncertain. Most of us understand that disaster can strike without warning, upending even our best-laid plans.

No matter how careful we are, there are no guarantees on our safety. Just recently, the Pacific Palisades wildfires in California engulfed nearly 24,000 acres of land, destroying thousands of homes and structures and tragically taking 15 lives. And that’s just one of many disasters – in 2024, the US experienced 27 separate weather disasters that each resulted in at least $1 billion in damages.

And while natural disasters are a serious risk, everyday dangers – like an accident on the road – are just as unpredictable. Although the roads have become safer in recent years, the National Highway Traffic Safety Administration estimates nearly 30,000 people died in traffic accidents in the first nine months of 2024.

These statistics are sobering, but they bring to mind an important consideration in a world where you never know when a curveball might hit you:

It is far better to have insurance and not need it than need insurance and not have it.

Key Findings

Instead of using a cookie-cutter formula to calculate your insurance needs, a systematic approach is far better.

To avoid over-insuring or under-insuring yourself, you must start with a realistic view of your current financial situation.

A good understanding of the various types of insurance you may need is essential to ensure you are optimally covered against major risks.

Major life milestones—like marriage, parenthood, homeownership, or retirement—change your financial responsibilities.

Regular check-ins with a professional can help you adjust your coverage based on salary changes, inflation, and shifts in your personal life.

Here’s a step-by-step guide to help you figure out how much insurance you need.

1. Assess Your Current Financial Situation

• • Age & Health: Your stage of life significantly influences your insurance needs. For example, if you’re a young, healthy individual with few financial responsibilities, you may need less life insurance and more health or auto coverage. If you’re older with children or significant assets, you may need more life insurance and umbrella coverage.

• • Risk: Think about possible events that could cause you financial harm – such as illness, an accident, or damage to your property – and the likelihood of their occurring.

• • Income: How much do you earn, and how stable is your income? If something were to happen to you (such as illness, injury, or death), would your family or dependents be financially secure? Understanding your income will help you decide how much coverage you need to replace lost income or protect your family’s financial well-being.

• • Debt: List all your liabilities, including mortgages, car loans, credit card debts, student loans, and any other outstanding obligations. If something were to happen to you, would your family be able to handle your debts?

• • Assets: Consider your savings, investments, home, vehicles, and other significant assets. How much would it cost to replace or repair these if something were to happen? This will help you understand the amount of coverage needed to protect your assets.

2. Understand Different Types of Insurance

You may need different kinds of insurance depending on your personal circumstances. These include:

Life Insurance

Death is one of the few “sure things” in life, and it’s also something all of us have in common. Yet, nobody likes to talk about their own mortality.

Many factors influence how much life insurance you need, including (of course) your age and the life stages of your loved ones. But the simple fact is: If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.

How Much Life Insurance is Right for You?

Insurance needs will vary greatly from person to person, but there are a few universal considerations:

• • Income Replacement: A common rule of thumb is to get life insurance coverage equal to 10–12 times your annual income, but the more considered approach is to multiply your annual income by the number of years you want to replace.

• • Debt Coverage: If you have significant debts (e.g., mortgage, car loans, student loans), you’ll want to factor this into your coverage to ensure your loved ones aren’t burdened with those obligations after your passing.

• • Future Expenses: If you have children, you should also consider future expenses, like college tuition costs and other monies to support them until they are financially independent.

• • Funeral Expenses: Don’t forget to account for funeral and final disposition costs, which can run anywhere from a few thousand dollars to tens of thousands.

• • Adjust for Savings: If you already have significant savings or other assets, you could subtract this amount from the total coverage needed.

Many other factors can change how much insurance is right for you. For example, if you or a family member have a significant medical issue, you may wish to increase your insurance. But you could decrease your coverage if your spouse earns a substantial salary, if your kids are self-sufficient and you have substantial savings.

Take Time Into Account

If you’re in great shape, you could buy a 20-year term policy and lock in a preferred price. Some term policies come with the right to convert to permanent life insurance, which you can keep for the rest of your life regardless of your health.

The best reason to consider whole-life or universal-life insurance isn’t the accumulating cash value (although that’s certainly a benefit). The real issue is whether you’ll need coverage beyond 20 or 30 years — or after age 65, when term policies can get expensive. Premiums will be higher for permanent life insurance than term life insurance at the beginning, but they usually remain level indefinitely.

Another reason you may consider choosing permanent insurance is if you need to protect kids with special needs who rely on you (or your estate) for support, or if you want to leave money to a charity (or your children) and don’t expect to be able to afford it any other way.

Health Insurance

Consider your plan’s deductible. Many people opt for high-deductible health plans to save on monthly premiums, but they come with higher out-of-pocket costs before coverage kicks in – and if you’re not prepared, this could turn a medical emergency into a financial one, too. Also, if you frequently visit the doctor or have prescription medications, a traditional plan with higher premiums but lower co-pays may be more cost-effective.

Aim to ensure that you have enough coverage to keep your typical medical expenditures from reaching into your pockets. Review your healthcare needs and the specifics of your plan to check for visit limitations for specialists, whether your medications are on the plan’s formulary, or whether your preferred hospital system is in-network.

Auto Insurance

• • Liability Coverage: This covers injury or damage you cause to others. State minimum requirements vary, but it’s a good idea to carry more than the minimum to protect yourself financially.

• • Collision and Comprehensive Coverage: These cover your own vehicle in case of an accident or damage from non-collision events (e.g., theft, weather).

• • Uninsured/Underinsured Motorist Coverage: If you’re hit by someone without sufficient insurance, this coverage will help cover medical bills and damages.

Homeowner’s or Renter’s Insurance

Whether you own or rent, having property insurance will ensure that you’re able to get back onto your feet after an accident or disaster.

• • Homeowners Insurance: This protects your home, its contents, and your liability if someone is injured on your property.

• • Personal Property: Estimate the value of your belongings (furniture, electronics, clothing, jewelry) to ensure you have adequate coverage.

• Liability Protection: You also need liability coverage in case someone is injured on your property – for example, if a guest trips and falls.
• Renters Insurance: Even if you rent, renters insurance is important to cover your personal belongings in case of fire, theft, or damage. It also typically includes liability coverage, and is often required by property management companies.

Disability Insurance

As we discussed at the beginning of this article, accidents or illness can happen at any time. Imagine you’re in an accident that prevents you from working several months – or even years. Without disability insurance, your paycheck disappears, but your bills don’t.

• • Short-Term Disability: This covers a portion of your income if you’re temporarily unable to work due to illness or injury (for a period of a few weeks to a few months).

• • Long-Term Disability: This provides coverage for an extended period if you’re permanently or long-term disabled and unable to work.

Consider replacing 60–80% of your monthly income with disability insurance if you rely on your income to support yourself and your family.

If your employer does not offer coverage, consider looking into private options.

3. Review & Adjust Over Time

Your insurance needs will change over time, so it’s a good idea to re-evaluate your needs after certain major life events, such as:

• • When you have a child: It takes a lot of money to raise a child — and it doesn’t get any cheaper if you’re not around.

• • When you are about to retire: This means no more insurance from work. If you die, your spouse could lose pension and some Social Security income.
    

Additionally, compare policies from different companies periodically to make sure you’re getting the best value for the coverage you need.

Final Thoughts

At its core, insurance isn’t just about protecting your finances – it’s about protecting your future and the people who depend on you. Whether it’s covering your income, safeguarding your assets, or ensuring your loved ones can maintain their lifestyle, the right insurance plan can provide a sense of security in an unpredictable world.

But finding the right balance requires careful consideration. By taking stock of your financial obligations, assessing your risks, and adjusting your coverage as your life evolves, you can ensure you’re neither over-insured nor vulnerable to financial hardship.

Our goal is to ensure that your financial plan is designed to meet your needs, so you can face the future with confidence and clarity. If you have questions about your specific circumstances, please get in touch – because when life throws the unexpected your way, the best protection is having planned ahead.

We welcome the opportunity to chat with you and wish you every success in the future.

Sam Gullette & Erik Alexander