How Much Life Insurance Do You Really Need?

One of the most common questions I hear from clients: "How much life insurance do I need?"

The answer isn't one-size-fits-all, but it's also not as complicated as many people think. Let me walk you through a simple framework to calculate the right coverage for your family—no confusing jargon or insurance sales tactics required.

Why the Old Rules Don't Work

You've probably heard the rule of thumb: "Buy 10 times your income in life insurance."

This is... better than nothing. But it's also overly simplistic. Two families with identical incomes can have vastly different life insurance needs based on their expenses, debts, savings goals, and financial responsibilities.

Instead, let's calculate what your family would actually need if you weren't there to provide for them.

The Income Replacement Method

The most straightforward approach is to figure out how much income your family needs to replace, and for how long.

Step 1: Calculate Annual Income to Replace

Start with your current gross income. But then make some adjustments:

**Subtract:** - The deceased person's personal expenses (they won't need these anymore) - FICA taxes (Social Security and Medicare)—your family won't pay these on life insurance proceeds

**Add:** - Any benefits that would be lost (health insurance, retirement contributions, etc.)

For most families, plan to replace about 70-80% of the gross income.

**Example:** - Gross income: $80,000 - Income to replace (75%): $60,000 per year

Step 2: Determine the Time Period

How long does your family need this income replacement?

Common scenarios: - **Until kids are through college:** If your youngest is 2, that's about 20 years - **Until retirement age:** If you're 35 and plan to retire at 65, that's 30 years - **Forever (in perpetuity):** For stay-at-home spouses or if you want maximum protection

**Example:** - Youngest child is 3 years old - Coverage needed until age 25 (22 years)

Step 3: Account for Inflation

A dollar today won't be worth the same in 20 years. Account for this by assuming a modest 3% inflation rate and a conservative 5% return on the invested proceeds.

This gives you a "real return" of about 2% (5% investment return minus 3% inflation).

Step 4: Calculate the Total Need

Using our example: - Annual need: $60,000 - Time period: 22 years - Discount rate: 2%

Using a present value calculator, you'd need approximately **$1,100,000** in coverage to replace that income stream.

The Detailed Needs Analysis

For a more comprehensive picture, let's add up all the specific financial needs your family would face:

1. Income Replacement As calculated above: $1,100,000

2. Debt Payoff - Mortgage balance: $250,000 - Car loans: $25,000 - Credit cards: $8,000 - **Total: $283,000**

3. Final Expenses - Funeral and burial: $10,000 - Estate settlement: $5,000 - **Total: $15,000**

4. Education Funding - College for Child 1: $100,000 - College for Child 2: $100,000 - **Total: $200,000**

5. Emergency Fund - 6 months of expenses: $30,000

Total Need: $1,628,000

Now Subtract Existing Assets: - Current life insurance: $200,000 - 401(k) balance: $80,000 - Emergency savings: $15,000 - **Total: $295,000**

Coverage Needed: $1,333,000

Most people would round this to **$1,500,000** in term life insurance.

Special Considerations

For Stay-at-Home Parents

Don't skip life insurance for a non-earning spouse. The value they provide—childcare, household management, transportation, meal preparation—would cost $30,000-$70,000 per year to replace.

Calculate coverage by determining: - Cost of childcare until youngest child starts school - Additional household help needed - The surviving parent's potential lost income due to increased responsibilities

For many families, this works out to $250,000-$500,000 in coverage for a stay-at-home parent.

For Business Owners

If you own a business, you need additional coverage for: - Business debts and obligations - Buy-sell agreement funding - Key person coverage - Protecting business value for heirs

This is complex enough to warrant a separate conversation with both an attorney and a financial advisor.

For High-Earning Households

If you earn over $200,000, the calculation gets more complicated because: - Your lifestyle expenses are likely higher - You may need to preserve wealth, not just replace income - Estate taxes could become a factor (though the federal exemption is quite high) - You might need permanent insurance in addition to term

Term vs. Permanent Insurance: What You Need to Know

For most families, **term life insurance** is the right choice. Here's why:

**Term Insurance:** - Covers a specific time period (10, 20, or 30 years) - Much more affordable ($20-50/month for $500,000 coverage for a healthy 30-year-old) - Simple and straightforward - Perfect for covering temporary needs (until kids are grown, mortgage is paid, etc.)

**Permanent Insurance (Whole Life, Universal Life, etc.):** - Covers your entire life - Builds cash value - 10-15 times more expensive than term - Makes sense for specific situations (estate planning, special needs planning, business succession)

**My recommendation:** Get a large term policy to cover your family's needs during the critical years. If you need permanent insurance, add it later after the term policy is in place.

How Much Coverage Can You Afford?

Here's the beautiful thing about term life insurance: it's incredibly affordable for most people.

Sample Monthly Premiums (30-year term, healthy non-smoker):

*Age 30:* - $500,000: $20-25/month - $1,000,000: $30-40/month - $2,000,000: $55-70/month

*Age 40:* - $500,000: $35-45/month - $1,000,000: $60-80/month - $2,000,000: $110-140/month

For most families, the cost of adequate coverage is less than their monthly streaming subscriptions.

Don't let cost be the reason you're underinsured. If you can't afford the full amount you need right now, get what you can afford today and increase it later.

Action Steps

**1. Calculate your coverage need** using either method above **2. Get quotes** from at least 3 carriers (use an independent broker who can shop multiple companies) **3. Choose term length** based on when your youngest child will graduate college **4. Apply quickly** (rates increase with age, and health can change) **5. Schedule a review** every 3-5 years or after major life changes

Common Questions

**Q: Can I lower my coverage as I get older?** A: Absolutely. As you pay down debts and build assets, your need for insurance naturally decreases. You can typically reduce coverage without reapplying (though you can't increase it without a new application).

**Q: Should both spouses have coverage?** A: Yes. Even if one spouse doesn't work outside the home, they provide valuable services that would need to be replaced.

**Q: What if I have health issues?** A: You may pay higher rates, but you can often still get coverage. Some conditions (controlled diabetes, high blood pressure, etc.) result in modest rate increases, not denial.

**Q: Is the life insurance through my job enough?** A: Probably not. Most employer policies only provide 1-2 times your salary. Plus, you lose this coverage if you change jobs. Get your own policy.

The Bottom Line

The right amount of life insurance is the amount that would allow your family to maintain their quality of life, meet their goals, and avoid financial hardship if you're not there to provide for them.

For most families with young children, this works out to **$1-2 million** in term coverage. It sounds like a huge number, but the monthly cost is surprisingly affordable.

The worst mistake you can make is to have no coverage at all—or to be significantly underinsured—because you were overwhelmed by the decision.

Need Help Calculating Your Specific Needs?

We work with families to determine appropriate coverage amounts based on your unique situation. We're not tied to any insurance company, so our recommendations are based solely on what's best for your family.

[Schedule a free consultation](/book) to review your life insurance needs.

Michelle Schee is a CERTIFIED FINANCIAL PLANNER™ professional serving families in Texas. This article is for educational purposes only and should not be considered personalized financial advice.