How Much Life Insurance Do I Need?


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How much life insurance do I need? That is the same question I asked myself not too long ago triggered by the birth of my son. Personally, I think the best way to answer this question is to educate yourself by reading articles like this one, use a few online calculators to get a rough idea, and then actually meet 2-3 life insurance agents, or financial planners, to flesh out the details. Here is the process we went through for our own insurance.

How Much Life Insurance Do I Need? 1

Life Insurance Needs Worksheet

To determine how much coverage my wife and I should buy, we completed the Life Insurance Needs Worksheet provided by an insurance agent.

The worksheet examines the 4 general factors:

  1. Date of Birth — As we get older, life insurance becomes more expensive, because of (1) we are more likely to die, and (2) there’s less payments for us to make (i.e., in case we buy whole life insurance where we pay the premium until 65).
  2. Gender — Even if my wife and I are the same age, her premium will always be lower than mine because (1) women live longer on average than men, and (2) men have more risk factors.
  3. Health — There are several health classifications. When we went through the process first time with Liberty Mutual, they had classes such as Elite, Premium, Standard, Sub-Standard, etc. People with the best health profile gets the best rate. The sales agent felt that my wife and I should be eligible for Elite because we were of average weights for our heights, and our blood pressure and cholesterol levels were normal.
  4. Smoking vs. Non-smoking.

The worksheet also examines 7 specific factors:

  1. Final Expenses Fund — This is the amount we need immediately to cover final expenses — e.g., funeral plot, embalming, casket, etc. He estimated this to be about $15,000 per person. Brip Blap has a good piece on preparing for the cost of dying.
  2. Emergency Fund — This is for unexpected bills and expenses. I thought it was strange that emergency fund was included in the worksheet, and the sales agent did in fact said to skip and ignore it. Personally, I believe everyone should have an emergency fund, and it shouldn’t be part of your death benefits.
  3. Outstanding Debts — If a spouse dies, the surviving spouse could become responsible for the debts. If both dies, the estate is responsible for paying any unpaid debts. So this is something we have to factor into the coverage we need.
  4. Mortgage and Rent Payment Fund — This is the mortgage payoff amount, or an amount sufficient to cover 10 years of rent.
  5. Education Fund — This is meant to partially cover our son’s college expenses. The agent recommended $100,000 to cover 4 years of public college, but I believe this amount should be closer to $200,000 — however, I did stick with his suggestion for this exercise.
  6. Income Replacement Fund — This is the extra money to keep the living spouse, or the beneficiaries afloat for a few year — it’s not meant to be a lifetime income replacement. The recommended amount is five years of current income. However, the sales agent said two years is the minimum, and that’s what he recommended we start off with.
  7. Current Liquid Assets and Life Insurance — This is the amount of assets that can be readily convert to cash. For our purpose, the sales agent recommended that we exclude the term life policy from my job and our retirement savings, e.g., 401(k) and IRA accounts.

Once we completed the worksheet, it was a simple addition of #1 through #6 and subtract #7. It turned out that I should buy $380,000 to cover my wife and our son, and she should buy $290,000 to cover me and our son.

Life Insurance Calculator

That was 10 years ago, now you can search the net and find a calculator like this one at Life Happens.  For example, this calculator also go through a similar process and ask a few questions to help you determine how much  life insurance you need. This one is a fairly simple 5-step process.

How Much Life Insurance Do I Need? 2
Screen shot from Life Happens Life Insurance Calculator taken July 2019

Although this type of calculator makes it convenient to estimate your needs, I personally feel that it is definitely worthwhile to meet 2-3 insurance agents and go through the process in person. This way, you can also hear what they recommend and why.

Options and Premiums

After we determined the coverage amount, we explored the following options for term life insurance, and the associated monthly premium.

Description My Policy
$380,000
Her Policy
$290,000
20 years term, elite $30.69 $20.58
20 years term, preferred $37.53 $22.93
30 years term, elite $47.45 $28.94
30 years term, preferred $61.81 $33.63

He also recommended that we look at whole life policy as a supplement to the term life policy. However, he suggested a smaller amount like $50,000 to $100,000 to supplement our term life policy.

I appreciated that he openly said buying any more than that in whole life is just a waste of money.

Here are the options:

Description My Policy Her Policy
$50,000 whole life – pay to 65, standard
(there’s no elite option)
$65.16 $41.27
$100,000 whole life – pay to 65, elite
(minimum coverage to qualify for elite)
$115.00 $67.95

Interesting Points

Our conversation brought up a few interesting points, not all of which we have answer to.

  • When I mentioned life insurance through work, the sales agent made a good point which I agreed with: the policy ends when I lose my job — and life insurance is something I don’t want to be without.
  • The sales agent mentioned that, on average, Americans buy 7 life insurance products through their life time to supplement, or replace existing one.
  • Life insurance payout is tax free to beneficiaries. This means that you’ll need less coverage to replace loss income. For instance, if you want to replace $100,0000, you’ll probably need only $80,000. Here’s a nice marginal tax rate calculator.
  • If we can’t qualify for elite, the sales agent suggested waiting a few weeks to get our health stats in order. As you can see it’s worth the wait for the differences in saving.

Bottom Line

I certainly think it is useful to understand the important components to consider when determining how much life insurance you need to have. Online calculators make it much easier to figure out the amount, or at least put you in the right ball park. Overall, the best bet is to talk to a professional. The key is the find the right agent or planner with fiduciary duty to help you figure out the correct amount and the right kind of policy (or policies) for your needs.



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