Three Methods to Determine How Much Life Insurance You Need

Three Methods to Determine How Much Life Insurance You Need
Eileen St. Pierre, The Everyday Financial Planner

How much life insurance do I need? Gosh, that’s a tough question. The answer differs for each person. Here are three methods you can use to help you determine your answer.

 1. Needs Analysis

This is the most accurate way to determine the amount of life insurance required. Using the following figure as a guide, estimate your family’s current and future income needs and subtract out the income resources available to your family.
Amount of Life Insurance Needed

Readjustment expenses refer to those costs that cover a transition period to a new life:

  • Child care
  • Additional homemaking help
  • Job training for a surviving spouse
  • Money to pay unusual expenses

There are many online calculators available to help you, such as those from

2. Income Multiplier

A common rule of thumb is to multiply your annual income by 10. Some people also add an additional $100,000 per child to cover future college expenses. This method is easy to use but ignores:

  • Social Security benefits
  • Both the assets and debts of the family
  • The impact of inflation over time on income needs

3. Agent Estimate

Finally, you can just rely on an agent’s estimate. While this requires little effort on your part, keep in mind who is making the estimate. Agents will make many assumptions about your family’s needs (and their potential commission). You know your family’s needs better than anyone else. Make assumptions yourself and then tell your agent.