How Much Life Insurance Do I Need?

Start with what your income is holding up

Life insurance exists to replace income that other people depend on. If your household would lose spending power when you die, there is a gap to fill.

Multiply your annual income by the number of years your family would need it. A household with young children might need twenty years of replacement. A household whose children are nearly grown and whose mortgage is nearly paid off might need five.

Add the one-time costs

Beyond income, there are obligations that do not disappear and are often the ones that force a family to sell something it meant to keep.

• Mortgage balance — the largest single number for most households
• Other debts: car loans, student loans, credit cards, personal loans
• Final expenses: funeral, burial or cremation, and outstanding medical bills
• Education costs you intend to fund for each child
• Childcare, if the surviving parent would have to pay for care they currently provide
• A transition fund — a year of breathing room so no decision has to be made in the first month

Subtract what your family would already have

Most households have more coverage than they think, and more assets than they count.

• Group life insurance through an employer — usually one to two times salary
• Any individual policy you already own
• Savings, investments and retirement accounts your family could draw on
• A surviving spouse's income, if it would continue
• Social Security survivor benefits, if your children would qualify

Be careful with the last two. A spouse's income may not be enough to cover the same standard of living, and survivor benefits have eligibility rules and age limits. Count them conservatively.

Duration matters as much as the amount

A $500,000 policy that expires in ten years does not cover a mortgage with eighteen years left. The term should run at least until your last major obligation ends — the youngest child independent, or the mortgage paid off, or you reach retirement.

Choosing a term that is slightly too long usually costs far less than discovering at renewal that you need new coverage at an older age and in worse health.

If you are a stay-at-home parent

Income replacement math misses the work that does not come with a paycheck. Childcare, transportation, household management and elder care are real costs that would have to be paid for if you were gone.

Price out what it would actually cost to replace those functions — full-time childcare alone is a substantial annual figure — and insure that. It is frequently the most overlooked coverage gap in a household.

If you own a business

A business interest adds a separate set of needs. If you are a partner, a buy-sell arrangement funded with life insurance lets the surviving partner buy your share without going into debt or into business with your heirs.

If you are a sole owner, key person coverage can cover the cost of replacing your role and keep the business solvent long enough to be sold or transitioned. These are specialist conversations, and they should involve your attorney or accountant.

Review it when life changes

The number you need is not fixed. A new mortgage, a new child, a raise, a business, a divorce, a child finishing school — each one changes the calculation in a different direction.

A short review every couple of years, and after any major event, keeps the coverage aligned with the life it is protecting. Most people never revisit it after the day they buy it.