The Bottom Line…

Finding the answer to “how much life insurance do I need?” begins with a careful, detailed examination of current and future needs dependent on a person’s ability to earn an income over a working career. It’s a solid first step in keeping lifetime responsibilities and objectives intact.

What Needs Can Life Insurance Fulfill?

When an individual dies, life insurance becomes an instant source of money. It can provide immediate cash to satisfy needs created as a result of the person’s death. And it can continue to provide for survivors’ needs for years to come. 

From an immediate cash needs standpoint, life insurance can pay final expenses – medical and funeral bills, estate administration costs and taxes, for example – arising from a wage earner’s death. It can also pay off a mortgage, retire any outstanding consumer debts such as car loans and credit cards, and establish emergency funds and children’s education funds.

Life insurance can also help replace a wage earner’s income for the survivors – regular, continuing income to pay for day-to-day living expenses including food, clothing, transportation, school expenses, medical and dental checkups, entertainment, gifts, and incidentals. It can make monthly mortgage or rental payments if there’s no mortgage payoff at death.

The amounts needed for any and all of these uses can vary across geographic areas. They also change depending on the affected people’s income level, accustomed lifestyle and personal preferences.

Do Cash and Income Needs Show How Much Insurance I Should Buy?

Not necessarily. Immediate cash needs can be adjusted for any life insurance that already exists, as well as other savings available to the survivors.

Adjustments can also be made to the income needs by deducting any Social Security income, a surviving spouse’s income, pension distributions from the deceased person’s account, and any other regular income that might be available.

What’s more, surviving family members may not need to replace 100 percent of the wage earner’s income. From 65 to 75 percent may be sufficient in some cases to maintain the family’s standard of living before the wage earner’s death.

Once these factors have been considered and adjustments made, the next step is to determine the number of years the income will be needed. Income needs may be less when children become self-supporting and when the surviving spouse’s earnings increase.

What Is the Human Life Value Approach?

This method for determining life insurance needs takes into consideration the monetary value to others of a person’s future earnings to projected retirement. It looks at the income the wage earner spends for self-support and assumes the remaining earnings are spent for the support of the dependents. With this figure, the present value of future earnings – also called the human life value – is calculated. Insurance companies use standardized tables to determine this amount, which becomes the starting point for identifying life insurance needs.

Finding the answer to “how much life Insurance do I need?” begins with a careful, detailed examination of current and future needs dependent on a person’s ability to earn an income over a working career. It’s a solid first step in keeping lifetime responsibilities and objectives intact.