Life Insurance · How much do I need?
How much life insurance do you actually need?
The standard rule of thumb — '10x your income' — is a starting point, not an answer. Real sizing comes from listing your obligations and subtracting what your family already has.
The arithmetic
The formula:
Total obligations − Existing assets = Insurance need
Sounds simple. The work is in being honest about both sides.
Step 1: Total your obligations
Walk through everything that would still need to be paid for if you weren't here tomorrow:
- Final expenses: $15,000-$25,000 (funeral, burial, outstanding medical, estate settlement)
- Debts to pay off: credit cards, auto loans, personal loans, private student loans (federal student loans typically discharge at death)
- Mortgage balance: what you'd want paid off so your family can stay in the home
- Children's future needs: college ($100K-$400K per child depending on school type), dependent care if your spouse needs to work more
- Income replacement: annual household contribution × years your family depends on you (often 15-25 years for parents of young children)
- Charitable or family commitments: anything you've promised that you'd want fulfilled
Step 2: Subtract existing assets
What your family already has available to cover those obligations:
- Savings and investments (not retirement — that's earmarked for your spouse's retirement, don't double-count)
- Employer-provided life insurance — typically 1-2x salary. Verify and don't rely on it lasting past your tenure at that employer.
- Existing life insurance policies
- Pension or survivor benefits (military, government, some private)
- Social Security survivor benefits — significant for families with minor children, often $50K-$300K in net present value depending on circumstances
Worked example
38-year-old parent of two, $140K household income, $60K spouse income:
Obligations:
- Final expenses: $20,000
- Mortgage balance: $340,000
- Credit card + auto debt: $30,000
- College for two kids (in-state public): $280,000
- Income replacement (15 years × $80,000 contribution): $1,200,000
- Total: $1,870,000
Offsets:
- Savings: $40,000
- Employer life insurance: $140,000
- Social Security survivor (estimated NPV): $250,000
- Total: $430,000
Insurance need: $1,870,000 − $430,000 = $1,440,000
Round up: a $1.5M-$1.75M term policy is appropriate.
How long do you need it?
Pick the longest term that covers your major obligations:
- Until youngest child is independent: typically 20-25 years if you have young kids
- Until mortgage is paid off: typically 15-30 years
- Until you're financially independent: often 25-30 years
For most parents of young children, 20-year or 30-year term is the right answer. 30-year is more expensive but locks in the rate while you're young and healthy.
When you might need more (or less)
More:
- Stay-at-home parent who provides labor worth $50K-$80K/year in childcare and household management
- Business owner whose business depends on you personally
- Significant lifestyle inflation outpacing savings
- Major charitable or family commitments
Less:
- No dependents and no significant debt
- Already approaching financial independence
- Spouse has high income and would not need replacement support
- Most major debts already paid off
Lean toward more coverage rather than less. The cost of being underinsured at the wrong moment is catastrophic. The cost of being slightly over-insured is a few dollars a month.
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