How Much Life Insurance Do I Need?

When determining how much life insurance is appropriate, 'rules of thumb' are not accurate and typically generate an excess amount of life insurance. I advise my clients to consider three primary issues:

  1. How much cash is needed at the death of my spouse?
  2. How much income do I need to replace?
  3. What are the resources I have that can be used in place of buying life insurance

For the following, I suggest using values, account balances, costs, etc. in today's dollars…today's present value/cost.

Cash Needs At Death

  • Final Expenses – How much will it cost to bury my spouse, final health costs, probate fees, etc.
  • Mortgage Replacement – How much is my mortgage balance (to pay off the house)
  • Other Debts – How much to clear other debts such as school loans, business loans, etc.
  • College Fund – How much does it cost (today) for my kids to attend college
  • Day Care – How much does it cost for child care for my kids
  • Emergency Fund – How much do I need in liquid savings to pay for 'emergency' expenses, such as a new HVAC or roof, appliances, deductibles on car/health insurance….usually 3-6 mos of living expenses is appropriate

Add up the above items and subtotal

Income Replacement

Assuming the above items are funded (i.e. deceased spouse is buried, mortgage is paid, all debts are clear, don't need to save for college, etc.):

  1. what, if any, does the surviving spouse need on an annual basis to maintain the current standard of living through retirement.
  2. what rate of return do you think the surviving spouse will earn on invested life insurance proceeds?
  3. Divide the answer from #1 by the answer in #2

Total Gross Life Insurance Need

Add the total from Cash Needs at Death and the Income Replacement figure to give you your total gross need.


What savings and/or assets that can be liquidated to help pay for the above expenses in lieu of life insurance? Some examples listed below:

  • Savings
  • Stocks/bonds/mutual funds
  • Retirement accounts (of deceased spouse only)
  • Current college fund savings
  • Net equity from downsizing primary residence
  • Current life insurance that you plan on keeping

Subtotal the resources and subtract from the total gross need above to arrive at your net life insurance need. The next step is to determine the right type of life insurance... term or permanent.

The above is just a guide. Call today to have a professional assist you with determining how much life insurance you need.

Read Bill Olmsted's Other Articles

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