Determining Your Life Insurance Needs Takes More Than a Calculator

While I don’t sell life insurance, I get a lot of questions about how much insurance someone should own.  Maybe it’s BECAUSE I don’t sell it that I get the question.  If I sold it, I’d have a vested interest in giving you a high number (along with my business card) so that you know how under-insured you might be!  While I get this question a lot, there really is no simple answer to it. 

If you go to Google and type “how much life insurance do I need?” you will get a huge number of results (I got 170 million) and many of them will be calculators. I used the first ten calculators that showed up and I got ten different results. (Here’s one example of a calculator that does a good job of considering many of the factors involved in the decision.)

So, how much insurance do you need and which calculator should you use? The reality is that which calculator you use doesn’t matter nearly as much as what you enter into it. It’s the old “garbage in, garbage out” concept.

For example, different calculators have various ways of asking you the same question: how much income would your family need if something were to happen to you? But if you haven’t thought this through in advance (and who really likes to think about their own death?), your answers could vary considerably depending on things like how the question is worded and even how you feel at that moment. So before you start plugging random numbers into a calculator, here are some questions you may want to ask yourself:

  • Do I want to leave enough money to create a wealthy spouse or wealthy kids?  Or, do I want to provide a comfortable yet not wealthy lifestyle to my heirs?
  • If I don’t make it home from work today, what are the “real world implications”?
    • Will there be a need for additional daycare or perhaps a full time nanny / au pair? How much would that cost?  For how long?
    • Do I want to pay off the mortgage? If so, how much would that reduce my family’s living expenses?
    • Do I want to pre-fund college expenses?  At a state school or an Ivy League?
    • Will my spouse be able to resume work full time?  Will (s)he be forced to work?  What are the financial ramifications?
    • How much of my income is needed to keep the household running & how much of that do I want replaced?
    • After my death, will my kids need my spouse at home more often until they all recover emotionally and will this increase my funding need?
    • What other assets (401(k), savings, investments, Social Security benefits) are available that could reduce the amount of insurance I need?

I am certain that you can come up with a few more questions like this that are relevant to your life. The point is that your answers to these questions will have a much bigger impact on how much life insurance you need than which calculator you choose. And once you figure that out, you can then begin the process of shopping for insurance, which we will talk about in a future blog post…



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