How Much Life Insurance Does a 40-Year-Old Need?

Family size and the amount of debt you have are both factors to consider.

Life insurance is a gift for those left behind after you're gone. Far from morbid, financial planning for after your death is a loving and generous act. How much life insurance you need, and what kind, can change over time. Here's how to approach the decision if you're around age 40. 

How much life insurance does a 40-year-old need?

When it comes to calculating how much life insurance you need, there isn't just one rule of thumb. There are several. The one that's right for you depends on your family obligations, the standard of living you wish to provide, and how much debt you have. 

Methods of calculating life insurance needs

Final expense life insurance

Pre-planning to cover final expenses can relieve financial stress during a time of grief. You can buy a small amount of coverage that will help your loved ones pay for your memorial and burial or cremation. A funeral typically costs $7,000 to $12,000. A hosted reception with refreshments would add to the total. 

Most term life insurance providers will not offer a policy this small. You'll need to get a permanent life insurance policy. There are different kinds, like whole life insurance and universal life insurance. The cost is higher compared to term life insurance, but if you are in good health, you might pay as little as $25 per month for a whole life policy of this size.

Ten times your salary

This simple formula is easy to calculate. If you earn $50,000 per year, you would buy $500,000 in life insurance. If you're 40 and single but want to leave a gift, the 10 times rule is a good benchmark.

For a 40-year-old woman in excellent health (not a tobacco user), a $500,000 20-year policy could cost about $30 per month in California (all other examples are for California, as well).

Ten times your salary plus $100,000 per child

Debts, especially a mortgage, could easily consume a six-figure life insurance benefit. Ten times your pay sounds smaller and smaller as you consider the expenses that will chip away at it. This formula gives you more coverage that could help raise and educate your kids. 

If you earn $50,000 per year and you have two children, you're looking at $700,000 in coverage.

For a 40-year-old man in excellent health, this policy might cost $40 per month.

D.I.M.E.

With the D.I.M.E. method (debt, income, mortgage, education), you add up your debt, including your outstanding mortgage balance, plus the income you expect to earn until all of your children reach age 18 and the amount you expect to need to cover your kids' education expenses. 

The average 40-something has around $350,000 in mortgage debt, and that doesn't include student loans, cars, credit cards, and other debt. With two kids, even on a modest salary you might find that you want a $1 million life insurance policy. 

A 40-year-old man in excellent health might pay around $50 per month.

Your salary times the number of years until you retire

Some working adults want to provide their loved ones with the same income even if something should happen before their working life is over. The formula is simple -- your salary times the number of years until you retire. 

Today's 40-year-olds will reach full retirement age and become eligible for Social Security at age 67. If you earn $50,000, you would want a policy for at least $1.35 million. 

You can get a 30-year term life insurance policy for this amount for about $100 per month. If you opt for a 20-year policy, the premium drops in half. 

How much life insurance should you buy?

When it comes time to decide how much life insurance to buy, the first thing to keep in mind is that life insurance premiums will never be lower than they are right now. They go up as you age. You can get more coverage for less money now, compared to the options that will be available to you if you wait. Also, if you end up with a health condition in the future, that could affect your rates or even your ability to be insured at all. 

You are the only one who can decide how much life insurance is enough, and how much of a monthly premium you can afford to add to your budget. Any amount is a gift. You don't have to buy so much that you make people rich when you die. But if you can, budget for enough to pay off your debts and help ease the financial transition to life without you.