How Much Life Insurance Do You Really Need?

Young parents hold a folded cardboard box over their heads while playing with their toddler in the living room.

(Image credit: Getty Images)

published 5 September 2024

While life insurance isn’t the most fun topic to discuss, it is an important part of your financial planning and, ultimately, the plan for your retirement. How can you determine how much insurance you truly need, though?

The first question to ask yourself is: Do you want or need life insurance? Since “want” is a very personal topic, I won’t spend much time there. Rather, the question is on need. So, how do you determine if you “need” life insurance? For starters, ask yourself, “If I suddenly passed away, would that leave a financial hardship for someone who is relying on my continued financial support?” If yes, then you likely have a life insurance need. The antithesis would be if someone isn’t relying on your financial support, and by that, I mean either assets or income.

For example, if you and your spouse are retired and/or have enough funds squirreled away you could retire, then truthfully you don’t have a life insurance need. You see, if you passed away, your significant other isn’t relying on an insurance policy to supplement your assets, as you’ve worked diligently over a lifetime to save ample assets.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Let’s talk numbers

Once you determine that you need life insurance, you’ll need to determine the type and how much. You can likely skip over the type, as most people can opt for term life insurance — but you’ll want to choose what is best for you and discuss it with a financial adviser or insurance agent.

To figure out the correct amount of coverage you need, you can also work with an insurance agent or financial adviser. They will likely work backward by determining what financial outlays will need to be taken care of when you’re no longer here (which sounds morbid, but it must be discussed). Let’s pretend that you’re currently 35 years old with two children and a single income of $200,000 per year. Your family may want to have the mortgage and college for the children taken care of if you were to die, so you’ll need to account for a mortgage (let’s say that is $400,000) plus anticipated college expenses for the two kids (let’s say $350,000). Let’s add in an existing student debt of $250,000 for the parents.

So far, we’d want to cover at least $1 million worth of life insurance coverage, just to cover student debts, future college expenses and the mortgage. We still haven’t touched on expenses for the surviving spouse, who now has no income coming in and still has children to care for — so you’d likely want to add in coverage here. You may want to add in $1 million of coverage for every $50,000 of residual income that you’d like to leave behind. So if you want $150,000 per year of residual income, you’d want to plan for $3 million in additional coverage. Add that to the million we’ve already added up, and now we’re at $4 million of coverage on the working spouse.

Don’t forget to cover the other spouse

Just because the other spouse isn’t working doesn’t mean that they don’t need coverage also — if they were to die prematurely, the family would experience financial hardship and additional costs. You’d likely need to add in the same $1 million for the debt coverage on this spouse, plus another $1 million to account for about $50,000 per year in residual income to cover expenses such as a nanny or childcare until your children are grown.

While it seems like a lot to leave behind, it goes fast, and term insurance is relatively inexpensive comparatively. It’s easier to protect your family with insurance and continue to invest and also protect your retirement as best you can at the same time.

Diversified is a registered investment adviser, and the registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. A copy of Diversified’s current written disclosure brochure which discusses, among other things, the firm’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.

Diversified, LLC does not provide tax advice and should not be relied upon for purposes of filing taxes, estimating tax liabilities or avoiding any tax or penalty imposed by law. The information provided by Diversified, LLC should not be a substitute for consulting a qualified tax advisor, accountant, or other professional concerning the application of tax law or an individual tax situation.

Nothing provided in this article constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

TOPICS

In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of financial industry experience. As a financial planner, Andrew forges lifelong relationships with clients, coaching them through all stages of life. He has obtained his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses. Andrew consistently delivers high-level, concierge service to all clients.