Life Insurance | How Much Do You Need?

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Photo by Leonid Mamchenkov

When it comes to life insurance and other financial decisions people typically try to find a one-size-fits-all canned answer and go with that number.  For this reason online financial calculators are popular.  I am not a big fan of initially rushing off to calculators as they might mislead your conclusions.  Typically when you use a financial calculator (like this) what you do is mindlessly entrust your preferences, values, comfort level, and future to a formula or equation.  I believe life insurance needs vary drastically by situation .  Your first step is to determine your needs and preferences.

In this Smart Money article it says that many of us have too much life insurance.

Factors  and questions to consider determining how much life insurance you need:

  • Family situation.  Before having children, a minimal amount of life insurance (probably $10,000) would probably be sufficient.  You just need enough to pay the burial costs.  This is because if one spouse were to pass away there would be no factors to hinder the other from entering (re-entering) the work force.
  • When you start having children the couple has a greater need for more significant life insurance.  Family obligations and commitment may prevent a serving spouse from working.
  • Do both partners work at home?  Is one spouse a homemaker? Are there any significant family costs in the future?
  • How educated and marketable is the surviving spouse?
  • What is your ‘grieving personality’? Do you think you would want to lock yourself up in the house for a year and cry?  Would you get cabin fever and need get out into public and into the workplace?
  • What would you do with children if one spouse died?  If the remaining spouse would stay at home then there would need to be sufficient funds to cover that family personality.  If the surviving spouse would prefer to work then ensure you have enough coverage to take care of day care expenses.  Remember, a working spouse may be able to cover those expenses through their future income.  Perhaps you would move close to your family if there were a death, then once again the need for money in that situation would be less.
  • Consider the possibility of remarriage.  No, I am not encouraging to consider who you would like to marry if your spouse died.  Just remember if you are younger then there is a statistically higher chance that a spouse will remarry instead of sitting at home for 10 years living off the life insurance.
  • Consider your financial position.  The irony is that the more debt you have, the less you might want to burden your spouse with that debt.  But the more debt you have, the less money you have available for purchasing extra insurance.
  • Burial and funeral costs.  Just pick up the phone and call a local funeral home,  “Hey, just thinking about life insurance and wondering what the average funeral and burial costs are these days.”
  • Consider all sources of life insurance.  Some companies and organizations offer life insurance.  Make sure you subtract that amount from the total insurance you plan to get.
  • Factor in the age of your children and their future plans.  If your kids are older and you have already saved for college, that will not be a factor.  If you are currently saving for college just ensure that you will have sufficient coverage to allow those contributions to continue.

How should you go about determining how much life insurance YOU need?

  1. Find an open evening if you are married and read over the list above.  Talk over the factors you think are most important in your current situation.
  2. Once you have talked about these conditions, as a couple ask, “How many years do you think you would depend on life insurance to subsidize your living?” Be sure also to ask the ever important question, “Why?”
  3. The easiest way to determine how much insurance you need is to determine how many years you would want to live off the insurance.  After you have agreed on the number of years, just take that number and multiply it by your estimated salary needs.  And then you have the amount of insurance you need.
  4. Now, you can visit a financial calculator (like this) and compare your finding with theirs.  Remember, your number took into consideration a lot more factors than that number.  Dave Ramsey recommends you get 10 times your annual income worth of life insurance.  But, again your situation might warrant less or even more.
  5. Start making calls or search the web to inquire about rates for the amount of insurance you are looking for.  Over the last several years any time I have looked into life insurance I have always contacted Zander Insurance.  While I cannot endorse Zander as I have not purchased through them (because of my unique situation of living overseas)I would definitely suggest that you find an insurance broker who will search amongst several different companies to help you find the best life insurance quote.  Learn about guaranteed issue life insurance.

The key is to find what you CAN frugally live on, not what you LUXURIOUSLY want to live on.

Insurance is a financially defensive posture, not an aggressive wealth building tool.  For this reason I carry term life insurance.  I am not trying to build capital or do anything fancy with my life insurance other than assure that our family will financially function if either myself or my spouse were to ever take a shortcut to heaven.

Any other factors you think are important to consider when thinking about life insurance?


  1. Leigh says

    This was really helpful. My fiance and I just took out 20 year term policies on each of us and we discussed a lot of what was in this article.
    .-= Leigh´s last blog ..Weekly menu and workout plan =-.

    • Craig says

      @Leigh Glad that the article was helpful.
      I thought of one thing I should add to the list – how many playing kids you have around. I slipped on a toy for the hundredth time today, perhaps I need to increase my amount of life insurance.

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