Life Insurance Needs

How much life insurance do you need?

It depends on the financial needs of those you will leave behind when you die and what financial effect your death will have on those survivors.

If you are a single, rent a house or apartment, and have little in the way of assets or debts, then you may not need any additional life insurance at all.

If you are married without children and your spouse works at a job which would support the spouse adequately if you died, and you as a couple do not have outstanding debts which would overwhelm your spouse, then you might not need any insurance either.

However, if you have children, spouse, or parents who require your financial help and would be financially stressed or ruined if you die, then you definitely need an adequate amount of life insurance.

The exact amount you will need can be roughly approximated. First you have to factor in your current net worth, the amount of that net worth which can be spent by your survivors (you can't cash out the house or your retirement accounts), the amount that Social Security and any pension benefits will provide to your survivors, the net reduction in household income which will be caused by your death, the net reduction to household expenses which will occur, whether you want to fund for your children's' college, whether you want to pay off the mortgage, and any other pertinent financial factors unique to your life situation. Some people are comfortable making their own calculation for a matter such as this. Others are more comfortable enlisting the aid of a financial planner or CPA to help them. Be aware that the techniques use by insurance salesmen to perform this analysis tend to overstate your insurance needs.

Finally, be aware that there are two main types of insurance: term and cash value. Cash value has legitimate uses for certain specific financial needs. But, since cash value life insurance includes an investment component, it is far more expensive than term insurance. So, if you are obtaining insurance for the purpose of protecting your survivors who depend on you financially, in most cases you should ignore all of the many forms of cash value life insurance such as "whole life", "universal life", or "variable life". Instead, focus on getting an appropriate amount of term life insurance from a reputable company.

To start you off in making your own estimate of the amount of life insurance you need, you can use the calculators shown below. You will be interested to observe that they each are based on different methods with different assumptions, and so give you significantly different estimates of your life insurance needs.

Estimator 1