How Much Life Insurance Do You Need?

How much life insurance do you need, exactly? How do you determine how much is enough? Are there rules of thumb? Are there limits to how much you can get? And if you are using a whole life policy, is it really providing you the death benefit you’re entitled to?

First of all, we’d like to clarify that no one “needs” life insurance. It’s not a staple of life like food, water, and shelter. And we are definitely not in the business of applying pressure or guilt to buy life insurance.

That being said, many of our clients WANT life insurance! They want it for many reasons. Some want the many benefits of cash value insurance to use while they are living. Others desire the protection and certainty that a death benefit provides for their spouse, children, and even business partner. And some people want all the benefits!

What If You Already Have Whole Life Insurance?

You’ve got a head start! If you have a whole life policy, you’ll have some permanent protection (assuming your policy stays in force). If you have a whole life policy in place, you may already be implementing Live Your Life Insurance  or Perpetual Wealth strategies. You may even be a business owner or real estate investor who wants a substantial fund for emergencies, opportunities, and cash flow flexibility.

In other words, the death benefit may be more of a “bonus” for you, rather than the main appeal. However, the death benefit is a critical benefit nontheless.

It is essential, however, to assess how much life insurance coverage you may WANT, in addition to the protection that a permanent policy provides. This may be a non-issue if you have no dependents (unless you have charities, foundations, nieces, nephews, or an alma mater that you wish to gift with a legacy). However, if you have children or spouses who depend on your income, even grown children or grandchildren that you wish to leave something to, then an adequate death benefit is probably worth your time.

The Sky is NOT the Limit on Life Insurance

It is important to understand that there is a LIMIT which insurance companies will not insure you beyond. If your spouse is making $30,000 a year and you wish to insure them for $20 million, you’re not going to find a company that will write that contract.

In calculating an adequate amount of life insurance, many people use a “multiple of earnings” method. Traditionally, a woman earning $60,000 per year might calculate that she needs coverage equal to ten times her salary, or $600,000. While this method is simple, it has shortcomings if multiples are too low.

For example, this multiple doesn’t measure non-wage value, and it also ignores potential wage increases. It also neglects factors such as debt (including a mortgage) and dependents. If you have children who will need a nanny if one spouse passes away, or who may wish to attend a public or private college, you’ll also want to factor that into your calculations.

Sometimes, people may even use a “needs analysis,” which ONLY accounts for the things that one would “need” to pay for, such as housing and debt. Both of these ways of calculating are incomplete, because they don’t actually tell you the full amount of insurance you’re entitled to. Because while you may not get that $20 million, do you really want less coverage if you CAN get more?

An even better way to determine coverage amounts is called “Human Life Value.” This is the same method that courts typically use to award judgments in wrongful death lawsuits. While Human Life Value can be more complex to calculate than “multiple of earnings,” it is considered a more accurate estimate.

Human Life Value: An Example

Human Life Value (HLV) is defined as the “present value” of all future income that you could expect to earn for your family’s benefit, plus other value you expect to contribute. Subtract from this any taxes and personal consumption. We’ll demonstrate with an example.

“Jane” is age 40 and wants to retire at age 60. She currently earns a salary of $60,000, of which 20% goes for her own personal living expenses and the other 80% for her family. Also, she provides an additional $15,000 per year of non-wage value to her family. (Think of this as the cost to hire a skilled domestic worker to perform her duties.) April’s total value to her family at age 40 is calculated as follows:


The next step is to increase this $63,000 for inflation over the next 20 years, to the date of her desired retirement. At a 3% rate of annual growth, her value would increase to $113,785 by age 60.

The last step is to apply a “discount rate” to each year’s projected total value, accounting for the time value of money. For example, at a discount rate of 4%, the total present value of Jane’s projected value through age 60 is well over $1 million. That is the amount of life insurance protection her family needs to adequately replace Jane’s earnings and insure against her death.

A Faster Calculation

Sound complicated? Here’s a shortcut! A simpler way to determine the Human Life Value calculation is to apply a simple underwriting guideline that life insurance companies frequently use to suggest coverage amounts. In general, your HLV is a multiple of your salary over your working years. So if you’re 30 and want to work at your current job until you’re 70, your HLV would be 40 times your salary.

So for Jane’s circumstances above, we could simply multiply her base salary of $60,000 by 20 years, and know that she is entitled to $1.2 million of death benefit.

What About Business Owners or Non-Working Spouses?

If you own a business, the insurance company will have no problems insuring for the full estimated value of the business (plus HLV, if you have a separate income). If you own a business or rental property in addition to having a job (many real estate investors have day jobs), you will want to include that income as well.

Spouses who don’t work outside of the home are often calculated at 50% of their working spouse’s insurability. Oddly enough, having children and owing debts doesn’t necessarily increase your insurability by much, but it DOES increase how much insurance you may want. Not everyone will be comfortable getting their entire Human Life Value in coverage, but we recommend getting close to it.

The Top Down, Bottom Up Approach

Identifying your full Human Life Value is the first, and ideal, step to getting your insurance desires taken care of. By knowing how much you’re entitled to, you have a great frame of reference to work toward. This is the “top down” view, so you have a great starting place. However, depending on your expenses, it may not be entirely realistic to purchase your full HLV in whole life insurance.

That’s where the bottom up approach comes in. How much money do you have available to save each month? What do you WANT to save each month? What can you afford? Do you have other accounts you want to save from? All of these questions can help you determine the amount of life insurance you are actually going to buy. Yet knowing what you CAN get has to come first so that you can get the coverage you’re comfortable with.

What KIND of Life Insurance Should You Buy?

With the “Top Down, Bottom Up” approach that we’ve identified, the basis is whole life insurance. That’s because a properly designed whole life insurance policy, with a mutual company, is a savings vehicle as well as a protection asset. The money you contribute in premiums directly impacts your cash value account, which is the liquid savings component. This cash value is like the “equity” of your death benefit. The more premiums you pay, the more of the total value you have access to via cash value. And in a dividend-earning policy with the correct riders, your death benefit also increases over time.

However, not everyone can fully insure themselves with whole life insurance, depending on your monthly cash flow and other assets. That does not, however, mean that you cannot fully insure yourself. Term insurance is temporary insurance that can help you bridge your coverage gaps, so you are insured up to your full HLV. If you have a spouse or children, you might want to have as much insurance as you’re entitled to.

If you expect your cash flow to increase over time, you may even want convertible term insurance. This is temporary life insurance that can be converted to whole life insurance over time. This is helpful if you have a debt you anticipate paying down quickly, or otherwise expect a greater savings capability in the near future. The term insurance locks in your current insurability, so you don’t have to reapply in a few years. That way, you get the best premium possible, as well.

What About Other “Permanent” Insurance?

We do NOT recommend ANY other kind of permanent insurance other than whole life with the proper riders. Universal Life and other insurance policies correlated to the stock market are unreliable. The added risk not only defeats the purpose of having insurance, but when the market takes a downturn policyholders may find their policies under-funded and in jeopardy!

Can We Help You Get Coverage?

Would you like help to identify what insurance you’re entitled to? Do you have an idea of how much you’d like to save, and want help automating it? We’d be thrilled to help you with life insurance policies that give you exactly what you want. We invite you to connect with us here, or email your questions to

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