How Much Life Insurance Do You Need?

Learn how to optimize life insurance as part of your overall estate plan

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Hi, I’m Paul.

Ask ten professionals how much life insurance is advisable and you are likely to get ten different answers. We recommend the following detailed three step-process to get a better idea of your particular life insurance needs. There isn’t a one-size-fits-all answer to the life-insurance question and we’re happy to help you optimize this part of your estate planning process.

If you have questions about the process, I’m here to help. There is no commitment and we provide free initial 15-minute phone calls. We look forward to meeting you.

Choosing Life Insurance: Step 1

If you are the sole income provider, multiply your gross (pre-tax) annual income by .80. (If both you and your spouse or partner work, combine both of your incomes and multiply by .80). This calculation will reduce your household income by 20 percent, but the reason you do this is that if anything happened to you, there would be one less spender in the household- you!

Choosing Life Insurance: Step 2

Divide your answer in Step 1 by the rate of return you would reasonably expect to earn on the life insurance proceeds once they are invested. Your answer here will tell you how much money you will need to continue the necessary income stream for your surviving family.

Choosing Life Insurance: Step 3

Subtract any savings or investments you already have from your answer in Step 2. The resulting number is the amount of how much life insurance you should own!

If you want to buy life insurance coverage with a death benefit, consult with an experienced individual.

Understanding Life Insurance

There are multiple types of life insurance policies available with different key terms. Here’s a brief overview.

  • Terms Life Insurance: This provides coverage for a specified term or period. If the policyholder dies during the term of the policy, the death benefit is paid to the beneficiaries.

  • Whole Life Insurance: This is a form of permanent life insurance that offers coverage for the policyholder’s entire lifetime. It also has a cash value component that grows over time.

  • Universal Life Insurance: This type provides more flexibility. It allows policyholders to adjust their premiums and death benefits and also has a cash value component.

  • Variable Life Insurance: This type allows policyholders to invest the cash value in various investment options, which can increase the potential growth of the policy’s cash value but also poses more risk.

How Much Life Insurance Table

If you’re planning to leave behind an inheritance or want to donate to charity, it’s recommended to get enough life insurance to help you fulfill these wishes. The amount of coverage that one needs varies, depending on where you are in your career, how much you earn, and the types of debts and financial obligations you have. Consult with an attorney for more information on your life insurance needs.

Key Terms in Life Insurance Policies

Here are a few frequently used terms in life insurance policies with their meanings.

  • Policyholder: The person who owns the life insurance policy.

  • Insured: The individual whose life is covered by the insurance policy.

  • Beneficiary: The person(s) or entity designated to receive the death benefit upon the death of the insured.

  • Premium: The amount of money the policyholder pays to the insurance company in exchange for the policy’s death benefit and any cash value.

  • Death benefit: the amount of money paid out to the beneficiary upon the death of the insured.

  • Cash value: A component of some life insurance policies, this is a separate account within the policy that grows over time tax-deferred based on premiums paid and interest or investment returns.

  • Rider: An addition to a life insurance policy that provides extra benefits or coverage at an additional cost.

  • Underwriting: The process an insurance company uses to determine how much risk a potential policyholder presents. This can affect the premiums and terms of the policy.

Life Insurance Example

Harry and Wanda Smith have two young children. Harry earns $80,000 a year, and Wanda earns $50,000 a year. The couple has two children. The couple assumes that they could earn a modest 5 percent on investments in the current economic climate. They have $150,000 in personal investments and in their retirement plans. Use their calculations as a model for your own:

The answer you get after completing this three-step process is only a rule of thumb, but it will give you a ballpark figure that will let you know if your current insurance is adequate or if you might actually be underinsured.

For a conversation about optimizing the use of life insurance as part of your overall estate plan, give us a call! We frequently help clients in estate planning, elder law, and conservatorship cases at the DeKalb County Probate Court. Take advantage of a free initial 15-minute phone call with a probate attorney in Atlanta.

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