Life Insurance

Life Insurance 101: How Much Coverage Do You Really Need?

Updated: June 6 2024 | 6:45 pm

Ah, life insurance. It’s not a fun topic; it conjures up images of complicated paperwork and it sounds..boring. But if you’re dealing with estate planning, the issue of life insurance is always going to pop up. So let’s break this down over a virtual coffee (or wine, I won’t judge). To keep it simple, you can click on each link to below to read about the basics of life insurance.

Why do you need Life Insurance?

Rule of Thumb


Consider Assets

Adjusting for Inflation

Toss the Intangibles

How much do you need in the way of Insurance?

Future Obligations

The Smith Family

Current Assets

Grand Tally

Why Bother with Life Insurance, Anyway?

Imagine, for a moment, you’re the main character in a movie. Picture this: If you were to unexpectedly exit stage left (y’know, kick the bucket), what would the storyline be for those you left behind? Drama? Romance? Financial horror? Life insurance is basically your way of ensuring your loved ones get a feel-good, everything’s-going-to-be-alright kind of movie instead of a nail-biting thriller. Life insurance provides a financial cushion for your loved ones if something should happen to you. Let’s break down life insurance for you, in the form of a romance-horror thriller.

Rule of Thumb: The Classic 10x Salary Guideline

You might have heard financial wizards say, “Just get a life insurance policy that’s 10 times your annual salary.” Easy-peasy, right? If you’re earning $50,000 annually, you’re looking at a neat $500,000 policy.

But let’s be honest, life (and death) isn’t a one-size-fits-all situation. So while this rule is a good starting point, there’s more to the story.

Digging Deeper: Future Obligations and Expenses

1. Debts: Think mortgages, car loans, student loans, credit card debt…you get the picture. Your life insurance policy should cover these so that your family isn’t saddled with your debts.

2. Funeral and Final Expenses: Funerals can be costly. And by costly, they could range anywhere from between $7,000 to $10,000 on average. That’s a lot of cheddar for a final farewell.

3. Children’s Education: Do you have kiddos? If you want them to get a degree without a side of student loan debt, factor in those future tuition fees.

4. Day-to-Day Living Expenses: Your salary might be gone, but daily expenses like groceries, utilities, and Netflix subscriptions (because, priorities) still roll in.

Considering Current Assets

“But wait,” you might be thinking, “I already have some savings and investments. Do they count?” Absolutely! If you’ve got a good chunk of change in savings, investments, or other life insurance policies, subtract these from your estimated needs. After all, you’re trying to fill a gap, not build a mountain of gold.

Adjusting for Inflation and Changing Circumstances

The future is as unpredictable as next year’s top hit single. Remember to add a buffer for inflation, especially if you’re looking at a 20- or 30-year term policy. And life is full of twists and turns: marriage, more kids, a bigger house. It’s worth revisiting your policy every few years to ensure it’s still a good fit.

Toss in the Intangibles

This is where it gets a bit emotional. Some folks want their life insurance to cover more than just the basics. Maybe you dream of leaving a chunk of money to your favorite charity or ensuring your spouse can retire without a worry. Or perhaps you want to leave a legacy fund for your kids and future grandkids. These aren’t definite expenses, but they’re worth considering.

So…How Much Life Insurance Do You Need?

We’ve covered a lot of ground, haven’t we? While that 10x salary rule is a solid starting point, everyone’s number will be a bit different based on individual circumstances. Think of your life insurance as a safety net tailored just for you and your family.

Here’s a quick formula to get you started on calculating how much life insurance you’ll need:

(Annual salary x 10) + (Future obligations and costs) – Current assets = Rough estimate of how much life insurance you need.

Then, once you’ve got a ballpark figure, chat with a financial advisor or insurance expert. They’re like the directors of our life insurance movie – there to make sure everything goes according to script.

Case Study: The Smith Family

Let’s meet the Smiths: Sarah and John, both 35 years old, with two kids: Liam, 7, and Emma, 4. John works in tech and has an annual salary of $80,000, while Sarah is a part-time freelance writer, pulling in about $20,000 annually. Together, they’re contemplating how much life insurance they need.

1. Using the 10x Rule

  • For John: $80,000 x 10 = $800,000
  • For Sarah: $20,000 x 10 = $200,000

2. Future Obligations and Costs

  • Debts: They have a remaining mortgage balance of $250,000 and car loans totaling $30,000.
  • Funeral and Final Expenses: Let’s take an average and say $8,500 each.
  • Children’s Education: They want both of their kids to attend college. Estimating $40,000/year for a 4-year degree for each child (remembering inflation and rising education costs), that’s $320,000.
  • Day-to-Day Living Expenses: Monthly bills and day-to-day expenses are about $4,000. Without John’s salary, Sarah will need help for a few years. Let’s buffer for 5 years: $4,000 x 12 months x 5 years = $240,000.

3. Current Assets

  • They have a joint savings account with $50,000 in it, and investments totaling $30,000.
  • John’s current employer-sponsored life insurance policy is $100,000.

4. The Grand Tally

  • For John:
  • Needed: $800,000 (salary) + $250,000 (mortgage) + $30,000 (car loans) + $8,500 (funeral expenses) + $320,000 (education) + $240,000 (living expenses) = $1,648,500 (the funeral expenses can be put on the backburner)
  • Minus assets: $50,000 (savings) + $30,000 (investments) + $100,000 (existing insurance) = -$180,000
  • Total Life Insurance Needed for John: $1,468,500 (Rounded to $1.5 million for simplicity)
  • For Sarah (considering she doesn’t make as much as John):
  • Needed: $200,000 (salary) + $8,500 (funeral, again, this could be put on the backburner) = $208,500
  • Minus assets (Assuming they’d use joint assets first if John was still around): $0
  • Total Life Insurance Needed for Sarah: $208,500 (Rounded to $210,000 for simplicity)

While John and Sarah’s life insurance needs, based on their individual incomes, although vastly different, are both are essential.

Remember, these numbers are based on a case study and can change. John and Sarah (just like you, dear reader) would need to revisit their life insurance policies in a few years. This is particularly true as debts decrease, their kids grow up, and their circumstances evolve. The Smiths’ story underscores the importance of regular financial check-ins. But for now, they can rest easier knowing they’ve taken concrete steps towards securing their family’s future.

The final take: life insurance is one of those adult decisions that seems complicated, but it doesn’t have to be. It’s all about ensuring your loved ones are cushioned from the financial what-ifs of life. So, grab another coffee (or that wine), crunch some numbers, and give yourself a pat on the back. You’re taking steps to protect your family’s future storyline, and that’s worth all the toasts in the world! 🥂📝💡