Life insurance explained: how to evaluate your coverage needs

By Nelson Rivera, CPA, Head of Insurance | Citizens Wealth Management

Key takeaways

  • The right life insurance policy is a personalized solution based on your financial goals and needs.
  • Term and permanent are two main types of life insurance, with various tradeoffs in terms of policy cost and coverage.
  • When determining the best life insurance coverage amount for your needs, consider goals such as debt repayment, income replacement, and funding future education expenses.

Life insurance is a key financial tool that can serve as a cornerstone of long-term financial security and family protection.

Whether you're starting a family, buying a home, or planning for retirement, the right life insurance policy can help safeguard your loved ones by providing a financial safety net when they need it most.

But with many options and types of life insurance policies, how do you choose the right coverage for your needs? Here’s what you need to know to make a confident, well-informed decision.

What is life insurance?

Life insurance is a contract between you and an insurer. In exchange for regular premium payments, the insurer provides a death benefit to your beneficiaries upon your passing. Policies can be structured for short-term or long-term coverage, depending on your goals.

Life insurance is commonly purchased by parents, caretakers, homeowners, business owners or individuals with financial dependents. The death benefit can help replace lost income, pay off debts, cover final expenses, and support long-term financial goals.

Some types of permanent life insurance may also provide living benefits through a savings or investment component that has the potential to build cash value over time.

What are the types of life insurance policies?

Understanding the differences between policy types is key to selecting the right coverage.

Term life insurance

Term life insurance provides coverage for a specific period, or "term," typically ranging from 10 to 30 years. During this time, the policyholder pays premiums in exchange for a death benefit that is paid out if the insured passes away within the term.

Term policies are designed for short-term financial needs like income replacement during working years or covering a mortgage. They are typically more affordable than permanent options, making them a practical choice for cost-effective coverage.

Whole life insurance

Whole life insurance is a type of permanent coverage. The death benefit is guaranteed by the issuing insurance company and lasts throughout the insured’s life, as long as premiums are paid and the policy remains in force. It also has a cash value component that grows at a rate set by the insurer and accumulates on a tax-deferred basis.

Policyholders can access it during their lifetime through loans or withdrawals, though doing so may reduce the death benefit if not repaid. While whole life policies are generally more expensive than term, they also may provide more opportunities for strategic financial planning and estate planning.

Universal life insurance

Universal life insurance is another type of permanent coverage, but with added flexibility. Policyholders may be able to adjust their premium payments and death benefit within certain limits, making it a versatile option for those seeking long-term protection that adapts to evolving needs.

Like whole life insurance, universal life also has a cash value component. However, the value of it may fluctuate, depending on interest rate changes, policy customizations, and other factors.

These policies may require more active management over time, but generally cost less than whole life while still offering the potential for lifelong protection.

Other life insurance options

Additional policy types include indexed universal life, variable life insurance, and hybrid products that combine life insurance with long-term care benefits. These specialized solutions can offer added flexibility and protection, especially for estate planning or extended care needs.

Infographic of a table comparing three insurance options which are Term life, Whole Life and Universal life and six common policy features and their differences including Cost, Death Benefit, Coverage Period, Ability to Build Cash Value, Flexible Death Benefit and Taxes

How much life insurance do you need?

While quick guidelines like the “10 to 15 times income” method can provide a starting point, the right coverage amount depends on your unique financial situation. Here are key questions to help guide your decision:

  1. What would your loved ones need financially if you were no longer here? Consider the current and future financial needs of those who rely on your income or caregiving support.
  2. How long would your family need financial support? Assess what duration of your income you'd like to provide for your spouse or dependents.
  3. What debts should be covered? Include mortgages, student loans, car loans, medical debt, home equity loans, business debt and more.
  4. Are there education goals to fund? Consider future tuition costs for college-bound children or other dependents.
  5. What final expenses should be included? Account for funeral costs, medical bills, legal fees, and taxes.
  6. Do you have philanthropic goals? Life insurance can support charitable giving through beneficiary designations or donated policies.
  7. What existing assets or coverage do you already have in place? Take stock of any employer-provided insurance, savings, investments, and other assets that could offset your coverage needs.

Calculating your life insurance coverage

As a hypothetical example, imagine that your goal is for your life insurance benefit to be able to pay off existing debt, provide income replacement to your spouse, and contribute to the college education for two children.

Totaling up the outstanding balance on your mortgage and other debts, you calculate that $300,000 would cover those amounts. For income replacement, your goal is to provide $5,000 per month over a 20-year period, adjusted annually for inflation. This amounts to a total value of approximately $1.6 million. For the two children, your goal is to contribute $25,000 per child per year toward a four-year college.

Lastly, you currently have $600,000 in savings, investments, and existing life insurance coverage that could be used to help offset your needs.

Following this example, the life insurance benefit amount would be calculated as:

Debt     $300,000
Income replacement + $1,600,000
College education + $200,000
Savings, investments, and employer-provided life insurance  - $600,000
Total benefit amount needed $1,500,000


This example illustrates how your goals and financial responsibilities determine your coverage needs. You can also use a life insurance calculator for a more personalized estimate.

Plan ahead with life insurance

Life insurance needs evolve with life’s milestones, such as marriage, children, homeownership, career changes and retirement. Regular policy reviews help ensure your coverage continues to align with your goals.

If you're ready to take the next step, a Citizens Wealth Advisor* can guide you through a comprehensive planning process, addressing life insurance needs alongside investing, retirement, and estate planning goals. Connect with a Citizens Wealth Advisor to build a financial plan as unique as your life.

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