How Much Life Insurance: Do You Need As Much As You Want or Want As Much As You Need?

One of the more common questions I receive from clients is, " How much Life Insurance do I need??"  Unfortunately, there is no real cookie cutter answer to this question because there are so many variables involved.  No two scenarios are alike when looking at all the varying specifics of one family situation versus another.  A very loose rule of thumb which is a good starting point is 5 to 10 times annual income in Life Insurance death benefit.  That is a big range, and inside of that range are many factors to consider, including the "need versus want" dilemma.

It is common to see "Life Insurance Calculators" on Insurance or Financial Planning websites that will try to fit everyone into a box with a uniform answer.  Our website is quite purposefully lacking this calculator since we feel this is a very personal question that requires a lot of insight and personal opinions that cannot be factored into a formula. 

The obvious criteria that will be considered first and foremost are age of the insured, income, assets and liabilities.  When it comes right down to it, the main purpose of life insurance is to replace the income of the insured should he or she die during those working years when the family would then be deprived all future earnings.  These are concrete numbers that can easily be plugged into a calculator that will spit out a nice round number.

The more complicated issues affecting insurance come down to personal preferences and philosophies.  Let's consider the situation whereby there is a dual income household and 3 young children, with each partner earning $150,000 per year.  If something tragically happened to one of the parents, it is logical to think that surely the family is going to be far from poverty stricken or destitute while still having a family income of $150,000.  This is where decision and choices are made that cannot be reflected in a formula--if the family was living a $300K per year lifestyle with a huge mortgage, vacation home, and other significant expenses, the loss of one parent could seriously compromise the ability to stay in the family home and maintain the same standard of living.  And, maybe the family is OK with that. It is a hard conversation to have when talking about the worst case scenario but a necessary one especially once children are involved.  Some of my clients are willing to assume a little bit of the risk and decide that if tragedy struck, they would amenable to selling the house and scaling back the current lifestyle.  There is no wrong answer as it is a situation that really comes down to personal preference.

I encounter all types of individuals with all types of philosophies, but will say that the majority of my clients tend to want to ensure their families are provided for in the same manner whether they are living or deceased.  We had this discussion in my own family when our children were very young and decided that if something happened to one of us, we did not want any sort of extra financial burden or reduced standard of living.  It was our philosophy that enduring such a terrible tragedy would pose such challenges for the family that we wanted there to be enough money to not only replace the income of the deceased but to allow the surviving spouse to spend time with the children and not worry about working for at least a couple of years.

For us, this was an easy decision because we were both very healthy and able to lock in on rates which were ridiculously low.  It was a no-brainer to be able to provide that much protection and have that much piece of mind.  We perhaps wanted slightly more protection than we actually "needed" versus the example of the couple above who technically probably "needed" more than they wanted. 

If you haven't sat down to have the "How much do you need versus how much do you want" life insurance discussion with your partner, there is no time better than today.  It is one of the most important family responsibilities you have and perhaps one of the most neglected.  And, either way, having some life insurance is certainly better than none at all.