Life Insurance

How Much Life Insurance Should I Buy and Why?


Deciding whether or not you need life insurance isn’t the hard question. Do you have loved ones who count on you for income? You need it. Do you have a business that would be paralyzed by your untimely demise? You need it. Do you have debt and you want your estate to avoid liquidation? You need it.

The big questions when it comes to life insurance is how much you need and why you need that specific amount. This article will break down what determines the volume of life insurance that you need and how to avoid having too much or too little.

The first thing that needs to be determined is your family’s needs set in quantitative terms. Vague concepts of a family’s desires need not apply, as this can lead to being over insured, or over-paying for insurance. Therefore, let’s set out some clear definitions for a family’s financial needs.

  • Debts consist of any debts that a family owes. These include mortgages, loans, taxes, credits cards, etc.
  • Education expenses consist of the cost of dependent education and related expenses for the policy owner’s children.  
  • End of life expenses are comprised of the total expenses expected at end of life, such as medical costs, funeral costs, and legal costs.
  • Income replacement is the difference between the surviving spouses earning ability subtracted from what is needed to cover living expenses. Be sure to include the possible cost for the surviving spouse to enter the work force or for changing careers.

Calculating costs like debts, taxes, educational expenses, and end of life expenses is fairly simple. Take the current day estimated expense and apply a basic inflation factor. At this point, your policy will need to include at least this cost to cover your debts and other liabilities.

Now let’s get down to the more tricky calculations. Outright, the likely largest costs for your policy will be the replacement of income. Income replacement can be further segmented into Dependent years and Non-Dependent years.

Dependent years are all the years that your children or spouse would be directly dependent on your income. Examples would be from child birth until graduation from college and the interim time it may take for your spouse to re-enter the work force. Dependency is more than necessities, as it may be important to you that your loved ones are able to maintain a standard of life that they have become accustomed to.

Non-Dependent years is more of a case-by-case circumstance, as it depends on the time frame for a spouse’s entrance back into the work force and the number of years a spouse is expected to work before retirement.

Now that the parameters for how to calculate the future value of Dependent costs and Non-Dependent costs are defined, you can calculate the present value of money needed to generate income replacement for the future. Remember to use conservative interest rates, as life insurance is a purchase against risk. Having the extra room to cushion market downturns is important.

Consider a case for a family of a husband who is 40 and a wife who is 35, looking for a life insurance policy on the husband. Their debts, education expenses and end-of-life expenses total $1,140,000. Dependent year income replacement for 15 years would need to be $6 million. Non-dependent years until retirement would need to be $8 million. A present value calculation for both the Dependent years and Non-Dependent years at a return rate of 5 percent would be $5.9 million. Therefore, the capital need which is the debts, education, and end-of-life expenses plus the income replacement need would be a total of approximately $7 million. Subtract the family’s current capital on hand (savings, 401k, and employer-provided life insurance) of $1.25 million from the total need to cover debts and income replacement and you’re left with a $5.8 million total life insurance need.

A meticulous analysis of ones assets and liabilities is advised as this analysis is meant to explain the mechanism of calculating total life insurance needs, and is not one size fits all. Following this mechanism is the first step in calculating how much life insurance you need and why. These calculations can be done with a spreadsheet tool and online calculators, but it is always advisable to speak with a professional about your needs so you can avoid blind spots when purchasing such an important risk-management asset.

Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.


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