Broker Check

How Much Life Insurance Do I Really Need?

| September 08, 2019

I know I need life insurance, but how much do I actually need?

Today's message is short and sweet. There are tons of ways to determine the right amount of life insurance to own. Computer programs, formulas, general rules of thumb. At the end of the day find one you can understand and utilize to figure out how much life insurance you need. Alright, let's get started with how we help our clients determine their need.

We ask three simple questions:

1. If you were to die and we could bring a check to pay off all of your debts and put $25,000 into an emergency fund for your spouse to take some time off work and pay for the funeral - how much would that check need to be?

2. After bringing the first check we are going to bring your family a check every month for the next 10 - 20 years depending on how old your youngest child is - how much would you like that check to be? (Typically 50-70% of your take home pay)

3. Finally we will deliver one more check to help fund a retirement for your spouse or help send your kids to college. How much do you want that check to be?

Add those three numbers up and that is the total amount of money we would bring to your family over the next 10 - 20 years. We don't need that much money today to provide that much money over that time frame, so take the amounts from questions #2 & #3 and multiply it times 75%. For example if you had $2,000/month for 20 years as your answer to question #2 - you would need $480,000 and if you wanted to leave $100,000 for college education as your answer to question #3 - you would need to have a total of $580,000. Take $580,000 times 75% and you have $435,000. Add that number to your amount from question #1 and you have the total amount you need to consider purchasing for life insurance today.

Obviously you are not done yet, because you may have existing life insurance in place like a group term insurance policy through your employer or maybe a policy Mom and Dad started for you when you were younger. Simply take your need and subtract those amounts off to determine the final amount you need to consider purchasing. Let's look at an example.

#1 - Debts & Final Expenses = $350,000

#2 - Income Replacement 50% for 20 years of $100,000 = $50,000 X 20 Years = $1,000,000

#3 - Retirement/College Funding at end of 20 years = $100,000 College & $0 Retirement

Total Amount Paid Over 20 Years = $1,450,000

Total Amount of Life Insurance Needed ($1,100,000 X 75% = $825,000) + $350,000 = $1,175,000

Existing Life Insurance - Group Term is 2 X Salary = $200,000

Total Amount Needed To Cover Your Goals = $1,175,000 - $200,000 = $975,000

There you have it folks, an easy way for you to quickly determine the amount of life insurance you need to consider purchasing to help your family meet the goals and obligations you have as a parent and/or spouse. Call us today if you need some help or check out our life insurance quoting center for an online needs analysis and free life insurance quotes.