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How Much Life Insurance Do I Need?

April 20, 2021
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Buying life insurance is one of the best decisions you can make for your loved ones’ financial future after you’re gone. Designed to cover your financial obligations after death, life insurance can make a major difference in your family members’ quality of life and financial security in the wake of their loss. Life insurance can be used to cover a variety of expenses for myriad beneficiaries, so whether you’re in middle age with a family or are a business owner with key employees, you will want to look at how life insurance can help your situation.


One of the most difficult things about signing up for a life insurance policy is estimating the amount of coverage you will need. Life insurance policies are designed to take on a lot of burdens for loved ones, so it’s vital that you choose a policy that can do plenty of heavy lifting. Below, we will look at how you can determine how much life insurance you’ll need to ensure your family is taken care of.

Determining How to Value Your Life Insurance Policy

First, Calculate Your Human Life Value

Understanding the concept of Human Life Value is a great starting point for deciding how much life insurance coverage you will need. This is the standard that the Life Insurance Industry Guidelines determine to be full coverage on the economic impact one brings into your household. Guidelines state that the multiplier should be the approximate years you have left until the average retirement age of 65. For example, a 35-year-old male making $150,000 annually would consider a death benefit of $4,500,000 ($150,000 x 30 years = $4,500,000). That is the maximum amount that person may have in total life insurance. 


If you pass away and your family takes those tax-free death benefit proceeds and invests them in an account that receives around four percent annually, they could generate your income for the next 30 years—that’s income they would otherwise miss out on because you are no longer alive. Not only that, they would also be able to save for their goals, retirement, send kids to college, etc. Once you know your Human Life Value, it will be an option to reduce the death benefit down  if you don’t want that full amount of coverage. 


Second, Consider the Impact of the Loss of Income

If you are still working and bringing an income into your household, losing that income is likely to have serious repercussions on your family’s quality of life. Whether you are the primary or secondary breadwinner, replacing your income is an important way to take care of those that you love, which can be done with an adequate life insurance policy—just don’t forget to calculate for inflation as you consider the sum your family will need.


Third, Do Your Research

Commonplace in the industry today is something called “needs-based analysis.” It’s when life insurance companies give you an approximate death benefit they think you should have. In addition, most property and casualty agencies will use education costs, current level of debt, burial expenses, and current level of assets to help you determine how much life insurance you should own. If you consider the main reason people purchase life insurance is to replace income, and if you spent all that death benefit money on debt and subtract the current level of assets, the beneficiary of your policy would have nothing left over—they’ve spent down your savings and retirement assets, and also now can’t count on your much-needed income. This may lead to a drastic change in lifestyle and force your family to make decisions they hadn’t considered for their well-being previously. 


It’s not the most exciting conversation to have with your loved ones, yet it could be one of the most important decisions you make for your family’s future. If you need help determining what type of life insurance policy is right for you, get in touch with us! We’re here to make sure your family’s finances are in order. Contact us today to see how we can help.