How Much Life Insurance Should I Have?

Have you ever thought to yourself “I could ask this question to 5 people and get 5 completely different answers!” None of the answers would necessarily be “right” and each could be supported by another person’s viewpoint. Or, maybe none of the answers were really what you wanted to hear in the first place!

I sometimes feel this is the case when I’m asked “How much life insurance should I have?” Two things I think we’ll all agree on though are 1) No one enjoys paying for insurance, and 2) No one thinks they’ll die prematurely. Let’s face it, we’d rather spend our hard-earned money on things we get enjoyment out of. Life insurance may not provide enjoyment, but it certainly provides peace of mind!. And I’m convinced most people think they’re invincible, even though death is one of life’s guarantees.

My goal with this post is to provide you with some items to consider and questions to ask so you may begin to evaluate your own life insurance need.

Let’s begin with why you should carry life insurance in the first place. There are three basic reasons I think most people should consider life insurance:

Income Replacement
For many people, their earnings potential is their greatest asset. Unfortunately, you typically can’t monetize your earnings potential for an immediate lump sum (i.e. get paid all up front). However, when you evaluate the sum of money you could earn over the remainder of your working years it may be a very large number. Whether you realize it or not, that’s an asset worth protecting…especially if you have dependents! After all, should you die prematurely, your earnings potential is gone.

Debt Payoff
As I talk with families about this very subject I’ll typically ask one spouse to consider their desires should their spouse die prematurely. Almost every time, the immediate response is “pay off our debt.” And who can argue since, if you’re like many families, your mortgage payment may be your biggest monthly expense? On top of that, many carry significant credit card, auto, or student loan debt. Should a spouse die prematurely, I think it’s natural to wish these significant cash flow items disappear so you don’t have to worry about them month after month!

Education Funding
Life insurance may also be a valuable way to set aside funds for a child’s future college expenses. Certainly each family will have different goals when it comes to saving and paying for college, but generally speaking this is another high desire should one spouse die prematurely. Regardless of whether you desire to fund 50% or 100% of projected future expenses, this may be an expensive goal since the average cost of in-state, public college now exceeds $24,000 per year!

Interestingly enough, there may actually be a diminishing need for life insurance to cover each of the three items listed above. As we get older, it’s typically assumed our future working years decline, our debts decrease, and our children complete school. As such, the need to protect each of these items decreases for many people and, therefore, the life insurance need may also decline.

Beyond the three basic reasons to carry life insurance listed above, the amount of coverage elected becomes very personal. In other words, there may be other reasons to carry life insurance, but each family’s needs and goals will significantly differ. Some practical questions to discuss with your family include:

What would the survivor do in the event of premature death? This is difficult to contemplate, however, think hard about your desire to continue working. Or perhaps you wouldn’t want your survivor to have to work? Maybe part-time would be the best option?

Do you have children? If so, would child care be necessary should you die prematurely? Do any children have special needs?

What are your family’s ongoing income needs? Your desired standard of living should certainly be considered when calculating your need for life insurance.

Consider these items and questions as a starting point when discussing with your loved ones how much life insurance is appropriate for you. While no monetary value should ever be assigned to someone’s life, it’s important to have sufficient coverage so that your loved ones are left in a stable position should something happen to you.