How Much Life Insurance Do You Need?

Written by Aaron Pinkston, Tue, Oct 20 2009

This is about life insurance how to, life insurance basics, personal choices

Recent Postings

Does Name Brand Life Insurance Matter?
Posted by Aaron Pinkston on Wed, Jul 07 2010
A Meaningful Legacy
Posted by Aaron Pinkston on Mon, Jul 05 2010
Doing Your Duty to Family
Posted by Aaron Pinkston on Mon, Jun 28 2010

Topics

How much life insurance do you need? This has been rehashed by so many people. I have a book on my bookshelf from 1927 with chapters devoted to the different ways to calculate your life insurance need. There are countless articles online from well-respected publications about how much life insurance you need.

And yet, you are here reading this. Trying to figure out how much life insurance you need.

I can’t tell you the answer to your dilemma. But I do know why you still search for it. The information is still confusing and scattered. The more confusing choices you have, the harder it is to make a decision and take action.

Here is One Way to Calculate How Much Life Insurance You Need

Before we get on to the rest, here is a quick way to shoot-from-the-hip to estimate your life insurance need. This only applies to income replacement. If you are a non-income earning spouse or need life insurance for business or estate taxes, you should seek the advice of financial professionals without conflicts of interest – like an accountant or a fee-only financial planner.

What you need to know:

Your annual income (i)
Your beneficiary’s expected rate of return on money managed over a long time (r)
The value of your liquid assets your beneficiary would own when you die (a)
Basic math

The formula to figure this out is: (i/r)-a

As a quick example, suppose you make $70,000 a year, your spouse would expect to make 6% over a long period of time, and you have $300,000 in retirement accounts and savings. You need somewhere in the neighborhood of $866,667 worth of life insurance.

(70,000 / .06) - 300,000 = $866,667

The Solution is Up to You

Still, the fear of making the wrong decision paralyzes us sometimes. And that’s the problem. Use two or three quick methods. If they get you in the same area, talk with your loved ones and make a choice.

You will be wrong. There are always unforeseen expenses, time value of money calculations, and rounding that will make the exact amount of life insurance wrong. Live with it and move on. Take action.

If you have taken action to protect your family within reasonable circumstances, you can sleep at night. You cannot wait to make the choice tomorrow. Today is a gift. Tomorrow is not promised. Don’t put off your decision.