How Much Life Insurance Do You Need? Get More Insurance for Less by Combining Policies

“A life insurance agent said to a would-be client: “Don’t let me frighten you into a hasty decision. Sleep on it tonight. If you wake in the morning, give me a call then and let me know.”
– anonymous

How Much Life Insurance Do You Need? Get More Insurance for a Less by Combining PoliciesHow 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 to store cash, is it really providing you the death benefit your family should have?

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 (or more of it).

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, and some desire the protection and security that a death benefit provides for their spouse, children, even business partner in a world of unknowns. (And some people want all of the benefits!)

In this article, we’ll look in particular at the death benefit part of life insurance, present rules of thumb for knowing how much insurance you might want, and show you how to increase your protection affordably.

What if you already have a Whole Life Policy?

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 whole life, you may be implementing Income for Life, Infinite Banking, or Live Your Life Insurance strategies, or you may be a business owner or real estate investor who wants a substantial fund for emergencies, opportunities, and cash flow flexibility. The death benefit may be more of a “side benefit” than the main reason you obtained the policy, but it is an important benefit nonetheless.

It is essential, however, to assess how much life insurance coverage you may WANT, in addition to the protection of a permanent policy. 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 you’ll want to put protection in place right away.

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 then 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, it 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 want to factor that into your calculations.

A 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, less taxes and personal consumption through your planned retirement date. We’ll demonstrate with an example.

“Jane” is age 40 and plans 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, until she plans to retire. At a 3% rate of annual growth, her value would increase to $113,785 by age 60. The final 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.

Sound complicated? Here’s a shortcut! A simpler way to roughly determine the Human Life Value calculation is to apply a simple underwriting guideline, such as those life insurance companies frequently use to suggest coverage amounts. In general, your HLV is 15-20 times your salary, so if you make $100k, you would be insurable for $1.5 – $2 million.

If Jane were 40 and earning $60,000, the recommended amount of coverage would be 15-20 times her salary, or $900k – $1,200,000. This supports results obtained in the Human Life Value Calculation.

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 properties 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 don’t necessarily increase your insurability by much, but it DOES increase how much insurance you may feel you need. Not everyone will be comfortable getting their entire Human Life Value in coverage, but we recommend getting close to it.

Other Ways to Calculate Life Insurance Needs

There are many variations and methods, and you may try more than one method to compare results. If the insured is older (perhaps retired), a “gross worth” figure may be used. (Value of estate and assets without debt.)

Some life insurance calculators take a needs-based approach, asking you to evaluate what the needs would be of the surviving spouse and dependents, adding for such things as college, debt, and gifts you want to make (such as for a down payment on an adult child’s home.)

We prefer the HLV calculation, though it does not always fit (such as during periods of unemployment or underemployment.) But regardless of the calculation method used, it is prudent to review your life insurance coverage periodically, especially as life, income, and other factors change.

What KIND of life insurance should you buy?

We recommend that people buy as much whole life as they can, then purchase term insurance to supplement death benefit. Most people are not able to afford the full amount of Human Life Value in whole life insurance due to higher premiums for permanent insurance. By making up the difference in term insurance, you’ll be able to stretch your insurance dollars inexpensively.

Although you can buy convertible term or renewable term, the best value for your dollar is definitely straight term insurance. (But don’t get a super short term to save a few bucks… you want this policy to last, ideally, until you no longer need to supplement your whole life insurance.)

Many people supplement with a 20-year term life policy while they are funding their permanent policy. With the proper riders, your whole life policy protection will grow along with your cash value, and as the kids grow up and as your savings increase, you’ll have less need for term insurance.

We do NOT recommend ANY other kind of permanent insurance other than whole life with the proper riders. Please, stay away from Universal Life and any permanent policy that promises you’ll be able to “invest” your premiums in the stock market. It not only defeats the purpose of having insurance, but when the market takes a downturn, policyholders have found their policies were underfunded and in jeopardy!

Where to Get Competitively Priced, Affordable Term Life Insurance

If you have a relationship with a life insurance agent who provides your home, car, health or other insurances, they may provide a discount for multiple lines. However, we invite you to compare any insurance offer with our rewards site at

P4P Rewards is Partner’s for Prosperity’s rewards site for our clients and subscribers, where they can get the best deals on term life insurance, home and car insurance, even health insurance, credit monitoring, and much, MUCH more! Insurance companies have to compete to be on this site, so our clients truly do get the BEST DEALS.

To see for yourself, click on the P4P Rewards link, set up an account (you don’t need a paid membership to access the great insurance deals), and shop! (Just be sure to calculate how much life insurance you need first!)

 Listen to a follow-up discussion on Guide to Financial Peace Radio: How Much Insurance Do You Need?