• Harry N. Stout

How Much Life Insurance Do You Need?

Updated: May 22


With the advent of the Covid-19 pandemic, many people are scrambling to put life insurance in place to protect their families and loved ones. As people look to buy life insurance, the question arises: how much coverage do I need? What follows is an edited excerpt from my upcoming book on today’s life insurance products. As you will see, there are many factors for you to consider.


In the financial media, you will often see recommendations that you need eight to twelve times your annual gross income in life insurance protection. These rules of thumb are a shortcut method to determine the coverage needed based on the results of applying a very rough calculation to a variety of different family situations. I recommend that you take the time to look at your own situation in more detail and see firsthand what your protection needs are. You don’t want to shortchange yourself in this very important area.

The Protection Spectrum

The protection spectrum is an easy way I developed to determine your protection needs. You do this by identifying and quantifying the amount of key financial risks you face or charitable actions you would like to take upon your death, and then, subtract from these identified risks the available assets you own that can be converted to cash to pay for these risks. Remember life insurance provides cash for future delivery when it is needed.


Your Risks that Need Money

The financial risks you are typically looking to cover are those that will need cash to pay for and include the following items:

  • Burial costs—the costs of a full burial or cremation

  • Final expense costs—the costs of a final illness including medical deductibles and coinsurance amounts

  • Living cost or income replacement for your dependents so that their standard of living is maintained either in the short term or for longer periods;

  • Your share of the funding of the expected retirement savings for your partner or spouse

  • Your unpaid debts—this would include mortgage, car, cosigned student loans, and installment obligations

  • The remaining unpaid costs or expected contribution toward the college or trade school educations of dependents

  • Funds for special situations, such as the following:

- Providing for special needs children who have a physical disability or cognitive impairment

- Providing for care taking costs for an elderly family member

- Repayment of large business-related debts

- Business ownership transfer—this would be the coverage on you that a business partner would use to buy out your interest upon your death

- Estate or donation creation—leaving a legacy for your family, a charitable organization, or church


Your Available Assets to Cover The Risks

Once you have determined the amount you need to cover your financial risks, you then need to calculate the amount of assets you can convert to cash to pay for these items. When adding together your available assets, you should include checking accounts, qualified retirement accounts, brokerage accounts, savings accounts, and any existing life insurance policies. However, you should only include the estimated after-tax amounts of retirement accounts, such as a 401(k) or an Individual Retirement Account (IRA). Remember that these accounts can have special beneficiary elections and income tax restrictions that need to be considered that may limit their availability to provide cash.


Coverage Needed

Next you should subtract the assets available from the amount needed to cover financial risks to determine how much coverage you need. In rare situations you may find you have more assets than risks and you will not need to purchase coverage. For most people, they discover that they have the need for more coverage than they can afford.


Affordability versus Need

After you complete protection estimate calculations, you may come to the realization that the cost of the amount of coverage needed exceeds your ability to budget and pay for it. This is not uncommon and is essential for you to know. My advice is to purchase as much coverage as you can cost effectively obtain and to cover as much of your protection needs for as long as possible. Do not buy more coverage than you can afford. The key is to buy the coverage and keep it in place. Your licensed financial professional can work with you to put in place coverage that can meet your minimum needs and secure your dependents. Take advantage of their training, skill, and experience to assist you.


My new book, The FinancialVerse – Today’s Life Insurance – A Protection Tool for Your Future, contains the detailed information you need to understand life insurance and how to use it to protect your loved ones. The book will be available this coming June.


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