How much life insurance coverage I need to buy was something that really wasn’t important to me until I got married.
My first policy was a $250,000 30 year term life insurance policy and I thought that was plenty. It was not until we had our first son that I quickly realized that was not nearly enough.
After his birth, I decided to increase it substantially. That was over two years ago. With us in the process of building our first home and a second son on the way, I’m left wondering even with that increase if I really have bought enough life insurance.
Update: We now have our third son and I have increased the amount of life insurance I have on myself. Check the end of the post to find what I’ve increased my term life insurance to and my rationale.
I know many struggle with this same decision so I wanted to shed some light how much life insurance is enough.
First things first, life insurance is for one purpose: income replacement. While there are times where life insurance can aid in more complex estate planning strategies, a majority of the time it’s purchased to take care of your family once you’re gone. My reasoning for purchasing life insurance is that I want to leave my wife and kids without any debt and the ability for my wife to not worry about finances in the event of my unexpected passing.
Life Insurance Coverage to Buy Rule of Thumb
As you can imagine, how much life insurance you need to buy will differ for each person. As a general rule of thumb, it will be a multiplier of your current income based on your age. To illustrate here’s an example that you can use:
Life Insurance Table
Life Insurance Needs Analysis
To determine how much term life insurance you need, you need to perform a needs analysis. Here’s a step by step guide to calculate how much insurance you might need.
- Total annual needed by your spouse and children in the event of your death.
- Number of years you would like to provide this income to your spouse or children.
- Your gross income annually.
- Your date of birth.
- Your spouse’s gross income.
- Would you like to pay off any outstanding debt? For example, mortgage, loans, credit cards, college. If so, enter the debt amount.
- Burial expenses. That can include funeral, probate, and any other legal matters.
- Total amount of your existing life insurance.
- Interest rate assumption. This assumes the interest death benefit proceeds are invested.
Life Insurance Coverage Example
To help illustrate how much life insurance you might need to buy, looks look at an example. First, let’s consider some assumptions. We’re looking at a 30 year old male who makes $100,000 a year. He wishes to give his wife a $75,000 a year income for 30 years if he were to die unexpectedly. We’re also assuming that the wife works and makes a $35,000 a year income. The final assumptions is that there is $400,000 of outstanding debt to pay off (for example, a mortgage and student loan debt), $10,000 for burial expenses and a 6% growth rate on the proceeds.
Life Insurance Example
Term Life Insurance Amount Needed
Based on the above assumptions, the husband would need to buy $993, 629 of term life insurance. The calculations are as follows:
Life Insurance Needed
Life Insurance Calculator (Update)
I just found this nifty life insurance calculator that should help you determine how much term life insurance you need. It’s simple to use and I’ve already used it with a couple of clients.
Shop Around
When buying life insurance, be sure to shop around rates. I’ve seen life insurance companies differ greatly in their premium amounts. To give you a gauge of what to expect to pay, the $250,000 policy that I mentioned that I took out when I was 28 cost me around $220 a year. That’s it! A couple reasons that it was so cheap was:
- I was young (why does that seem so long ago?)
- I was (and still am) in good health.
Nonetheless, that’s a small price to pay to ensure that your family is taken care of after you’ve gone.
More Kids = More Life Insurance (Update)
As I mentioned at the beginning of the post, our second son was on the way and I was left wondering if I had bought enough term life insurance to cover my family. Now writing this post, we have welcomed our third son and once again, I’m left wondering if I have enough. Here’s what I’ve done to this point.
After returning from Iraq and losing the SGLI (military insurance), I purchased a 30 term life insurance policy with a face amount of $250,000 (mentioned above). When our first son arrived, I purchased a separate 30 year policy with a face amount of $500,000. In case you can’t add, that brings the sum total to $750,000.
Do You Really Need More Insurance?
To most people that seems like a lot of insurance – and it is. But the Rose household wasn’t done producing babies 
Our second son soon arrived and I knew that I needed to up the insurance amount. At this point, I was done going through life insurance medical exams and was ready to really up the ante. This time I had decided that I buy another 30 year term policy, this time for a lump sum of $1,500,000. That’s a lot of zeros, huh? Trust me, it felt weird for me, too.
So now I have a total of $2,225,000 of term life insurance. Cha-ching.
My rationale. Somewhat going against the calculation above, I went for a more simpler approach. I thought to myself how much of an income would my wife need to take care of herself and the kids in case I wasn’t around. We decided that $100k would be adequate.
Secondly, I concluded that 5% was an attainable rate of return (or withdrawal rate) that she could get on the money if she invested it. Really simple math says that $2,225,000 x 5% will get her $112,500 a year. Should be more than enough to take care of mama and the kiddos.
Lastly, term life insurance is cheap! For that amount of coverage my premium is nothing compared to the financial benefit that my family will have if something happens to me.
Life insurance is a must. If you don’t have any yet, see how cheap it is by using the quote engine below. Or you can get a free life insurance quote here.
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{ 21 comments… read them below or add one }
I thought your how much term life insurance post was right on. Thanks for even going further with it and showing us how to figure up the need.
Ah, there’s nothing more romantic than talking to your true love about life insurance!
So, I am still a little confused about how much insurance to get on my husband. I’m 22, and my husband is 25. We have no debt at all and have saved up for a downpayment on a house. Our househould income is $75,000, but we live on $40,000 and save the rest. So do we really need $1,200,000 in insurance ($40,000 x 30 years = $1,200,000)? I found a $1 million/30 year policy for $63/month. That’s more than I would like to spend, especially since my husband is so young and chances are he will live past the ripe old age of 55 (I hope a lot longer). Is a $250,000 policy enough? I could live off that for several years. By that time I should be able to find another husband! (kidding)
We have no kids, but will have a few in the next 10 years. Should we buy more insurance once the kids come, or do it now?
Also, should we get a 15 or 30 year term? I found a $250,000/15 year policy for $25 a month. The 30 year is $42. The Scrooge in me says get the cheaper one.
Thanks for your help!
@Rachel. Haha. That is very romantic, huh?
To answer your question, I’ll explain what I did for my family so that maybe you can apply it to you. After we had our second child, I decided that if something happened to me I would want my wife to have $100,000 of income per year. Figuring that she could get about 5% return on a moderately conservative portfolio, I have purchased a total of $2.25 million of 30 year term life insurance. (The extra $250k was for safe measure) This obviously doesn’t included our savings, retirements accounts, and business investments. I really felt that at the age of 32 that I had plenty of life insurance……welcome, third child.
Now I’m considering purchasing another $750,000k to get me to a cool $3 million. My point in sharing this with you is that, you may think you have plenty now, but your needs will change especially as you welcome young ones into your family.
I would definitely get the 30 year policy. You may pay an extra $17/mo for now, but you can always just stop paying on it at any time.
Let me know if you have any other questions!
Good article jeff. Here in Australia the majority of the population is underinsured. I would like to forward your article to my clients with your permission.
kind regards,
John
Sure thing. Obviously, I think it’s very important that people really understand how much term life insurance they should purchase, so the more people that ready this post and actually purchase life insurance the better!
Jeff,
Great article. Research has consistently shown Australians don’t take out adequate levels of insurance to protect themselves and their family. In fact, research commissioned by IFSA in 2005 showed parents with dependents were critically underinsured by $1.37 trillion. Thinking of that another way – only 4% of the total population with dependent children have adequate levels of Life Insurance cover. Everyone needs good financial planning.
Great article, Jeff. Very comprehensive and informative. I am going through the exact same situation you’ve described. I thought I had taken adequate life insurance, but now a kid later, I’ve had to reassess and come to the conclusion that I haven’t taken as much life insurance as I need. I’ve been confused about how much is adequate and that’s one of the reasons I’ve not taken additional cover still, for I don’t want to have to buy yet another life insurance down the line.
Thankfully, your article has given me some excellent pointers on how to go about assessing the amount I really need. I am wiser for your article and hope to come up to the amount I should take my additional cover for. Thanks again for this informative article
You’re very welcome. When it comes to choosing how much term life insurance you should buy, it often can be confusing. I’m glad the post helped out!
I was quoted for 30 years for myself and it includes child coverage, 950k w/Child Coverage 79/mo, or go with 800k w/Child coverage 68/mo.
I’m 36 years old. I don’t know if this is a good price. Is it?
@Michelle
Did you use the quote engine on my site or are those numbers from another agent?
Hello,
I enjoyed the article! It was extremely informative. Can you please tell me how to shop for term life insurance companies and where?
Thank you!
@ Maggie
I would have you try out the life insurance quote engine on my site found here: http://www.goodfinancialcents.com/financial-planning/free-life-insurance-quote/ if you are considering buying term life insurance.
To test it out, I compared it to a few other services and it was spot on getting me the lowest term life quote when I recently refinanced my own term policies.
This was a very helpful story. I found antoher resource that is full of good information, as well. I recently had to add 500,000 to my policy after my second son was born. The question of what is my family to do if I pass away becomes a lot more surreal once kids enter the picture! Thanks again for the information, hope mine helps add to the discussion!
This is a terrific analysis. I can’t tell you how many people think the Dave Ramsey method of “just multiply x times your annual income” is the be all and end all. There’s obviously a lot more factors that go into determining the right level of coverage.
Excellent post Jeff. I’ve been considering whether or not I have enough life insurance and after reading your summary I think I need to invest in a bigger policy. Between a mortgage and 3 young kids to take care of I want to make sure my wife will have plenty of resources if I’m gone unexpectedly.
@ Mike
Thanks for comment! As you can see, with 3 kids I definitely didn’t think I had enough term life insurance. What was even more exciting was that I was able to get $250,000 more coverage and actually saved money on getting a new 30 year term policy from a different carrier (Banner Life).
Jeff,
How did you get the $583,629 on the Insurance Analysis Part. Can you please explain to me ?
@ Mike I had plugged that into a life insurance needs calculator that I have through my brokerage firm’s intranet. I was trying to find something similar (life insurance calculator) that you could use, but am having difficulty trying to track one down.
Essentially all we’re doing in running a life insurance calculation like the ones above is determining the net present value of future income and replacing it in a lump sum. Put simply, you need to buy enough life insurance to replace the income you haven’t yet earned if you were to die today. One can get into a host of philosophical debates as to what this actually translates to in dollars and cents but the above estimates are in the ballpark.
Jeff,
Great article! Exactly what I’ve been looking for. Back in 04′ I took out 500k and my wife 400k of 30yr with only 1 child then. I was 33 she was 23. Now I’m 41 with 3 kids so the wife and I agree to that we should up the coverage to at least $1million (still not sure if that’s enough). Kids are 5, 7 and 10. We need to do this soon. I recently check for another 500k 30yr term on me costs around $70.. and the wife $50. Something in my head says we should get another $1million each. We are corporate white collar with some room to climb the corporate ladder. Our combined income is 130k. Like you I want my wife to have enough income to support the boys when I’m not around… ( hope she doesn’t marry a DB and milk her of the $$.. lol..)
Two quetsions – 1) There has to be some cheaper 2) The first policy we have are with Prudential… so should we take out new policies with them or for lack of a better word “diversify” and get them elsewhere?
Thank you.
In terms of life insurance, there is no such thing as “too much” because we wouldn’t really know how much our family needs when we are no longer around. It is better to secure then with an amount that can give them a comfortable life and let’s leave the rest of the financial planning to them.