How Much Life Insurance Do I Need? When to Increase and Decrease Your Policy

man holding a paper family under an umbrella

Life insurance tends to be one of those “set it and forget it” financial tools that most people don’t think about. And while you’ve probably heard some pretty scary statistics about people who are underinsured or uninsured (about 102 million Americans – yikes), there are also quite a few people out there who might have policies that they either don’t need or might not be right for their current situation.

So, let’s break it down: When should you increase your life insurance, and when is it time to decrease it?

When to Consider Increasing Your Life Insurance

 

You Have a New Baby (or More Kids)

Why it matters: Children bring joy, love… and significant financial responsibility. From diapers to daycare to college tuition, each child increases your financial obligations.

Cost considerations:

How much more coverage?
A general rule is to add $250,000–$500,000 per child to your life insurance policy to cover childcare, education, and future expenses.

You Buy a Home

Why it matters: If you pass away unexpectedly, you don’t want your family to struggle with mortgage payments.

Mortgage statistics:

  • The median US home price is $417,700 (as of late 2023), with an average mortgage balance of $236,443.
  • Many homeowners take on 30-year mortgages, which means long-term financial obligations.

How much more coverage?
Increase your coverage to at least match your mortgage balance so your family isn’t forced to sell the home if something happens to you.

Your Income Increases

Why it matters: If you’ve earned a big promotion or changed careers, your lifestyle and expenses have likely increased. If your life insurance was based on your old salary, it might not be enough to replace your current income.

Rule of thumb:
Most financial experts recommend having life insurance coverage equal to 7–10 times your annual income to protect your dependents.

You Start a Business

Why it matters: If you’ve started or expanded a business, you may have taken on personal liability for loans, equipment leases, or business expenses.

Business owner considerations:

  • Key person insurance: Protects your business if you or a key partner unexpectedly pass away.
  • Buy-sell agreements: Ensures co-owners can buy out a deceased owner’s share of the business.
  • Debt coverage: Ensures business loans don’t become a burden on your family.

How much more coverage?
Evaluate business-related debts and potential succession plans to determine the right coverage amount.

You Have Someone Financially Dependent on You

Why it matters: Aging parents, special needs siblings, or anyone else who relies on you financially may need ongoing support even if you’re not around.

Important stats:

How much more coverage?
Factor in the cost of long-term care, medical expenses, and daily living costs for dependents when calculating additional coverage.

 

When You Can Reduce Your Life Insurance

 

Your Kids Are Grown and Financially Independent

Once your children are supporting themselves, you no longer need to account for their upbringing and college expenses. If they’re out of the nest, your coverage can reflect that.

Helpful tip:
Before reducing coverage, make sure your children truly don’t need financial help—especially if they have student loans, limited savings, or young families of their own.

Your Mortgage Is Paid Off

No more mortgage? That’s a big financial burden lifted. If your life insurance was primarily to cover your home loan, you might not need as much coverage anymore.

What to do next:
Reevaluate how much coverage you need—especially if your original policy was designed primarily to cover housing costs.

You’ve Built Up Significant Savings and Investments

If you’ve done a great job saving and investing, your assets may be enough to cover your family’s needs without relying on a large life insurance payout.

Key benchmarks:

  • A well-funded retirement account
  • A paid-off home
  • Sufficient liquid savings and investments

Next steps:
If your net worth is high enough to cover final expenses, debts, and ongoing family support, you may only need a small policy – or none at all.

You’ve Retired with a Strong Financial Plan

By retirement, many people find their financial needs have shifted. If you no longer have dependents or major obligations, you may not need as much life insurance – especially if your spouse is financially secure through pensions, Social Security, or other investments.

Consider keeping a small policy if:

  • You want to leave a legacy gift to heirs or charities.
  • You have estate tax concerns (for estates over $13.61 million in 2024).
  • Your spouse needs additional income replacement beyond pensions and savings.

Your Business No Longer Requires Protection

If you’ve sold your business or no longer have business-related financial obligations, you might not need as much coverage for buy-sell agreements or business debts.

 

Life insurance isn’t one-size-fits-all, and your needs will evolve over time. The good news is that sometimes those milestones mean a decrease in your policy! Either way, your life insurance coverage is part of your overall financial plan and that’s where we can help.

Let’s evaluate where you are to make sure you’ve got the coverage you need. CLICK HERE to make an appointment.

Share This Post

Subscribe To Our Newsletter

Stay informed about the latest trends, strategies, and tools to help you achieve your financial goals and secure a prosperous future