How Much Insurance Do You Actually Need?

Insurance exists to transfer risks you could not survive financially, an early death, a disabling injury, years of late-life care, to a company that pools them. Bought right, it is one of the best deals in finance. Bought wrong, as an investment dressed up as protection, it quietly drains money you could put to better use. The difference is knowing what you actually need.

This guide covers the coverage that matters most, how much of each to carry, and the common ways people over- and under-insure.

How much life insurance you need

Life insurance is for the people who depend on your income. If no one relies on you financially, you may need little or none; if a family does, you need enough to replace your income and clear major debts for as long as they would need support. A common approach adds up future income to replace, debts to pay off, and goals to fund, then subtracts existing savings.

The result is often larger than people expect and cheaper to cover than they fear, because term insurance is inexpensive.

Term vs. whole life

Term insurance covers you for a set period, twenty or thirty years, for a low premium, and expires when your dependents no longer need it. Whole life lasts forever and builds a cash value, but costs many times more for the same coverage. For the vast majority, buying term and investing the difference protects the family and builds wealth far more efficiently than bundling the two.

See what investing the premium gap could build with the term vs. permanent calculator.

The coverage people forget

You are far more likely to be unable to work for a stretch than to die young, yet disability insurance is the coverage most people overlook. It replaces a portion of your income if illness or injury stops you from working. Many have some through an employer; check whether it is enough, because your ability to earn is usually your largest asset.

Size the need with the disability income insurance calculator.

Long-term care

The cost of extended care later in life, assisted living or a nursing home, can run into hundreds of thousands of dollars and is not covered by regular health insurance or, for long stretches, by Medicare. Long-term care insurance addresses it, though it is not cheap and is best considered in your fifties or sixties. Some choose to self-insure with dedicated savings instead.

Estimate the exposure with the long-term care calculator.

Coverage you can usually skip

Not every policy earns its keep. Extended warranties, credit life insurance, and narrow policies for specific illnesses are usually poor value, because they insure risks you could absorb or that are unlikely enough not to matter. Self-insure the small stuff, an emergency fund handles most of it, and save your premiums for the catastrophes you truly cannot.

Frequently asked questions