Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 19, 2021

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Insurance Q&A: “How much life insurance do I need?”

Too Little Life Insurance Might Be Worse than Too Much

While it’s a tricky question to answer, having too little is perhaps worse than having too much. Although, a case can be made that too much life insurance is a waste of money as well.

There are a few main concerns you must take into account when calculating how much life insurance you should purchase, assuming you need it in the first place.

Let’s get started: Get out (or create) your household balance sheet.

First, you need to make an accurate assessment of your outstanding debt, or how much money you owe (including interest).

One of the main reasons for obtaining life insurance, such as a term policy, is to make sure you don’t leave anybody in a bad position when you kick the bucket.

If you own a house, two cars, and hold student loans, you’ll want to make sure they can be paid off in one shot.

For example, let’s say you’ve got the following outstanding obligations:

Mortgage balance: $300,000
Auto loans: $50,000
Student loans: $5,000

Write down $355,000 (plus any potential interest) on that household balance sheet.

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Are You the Breadwinner or DINKS?

Next, you need to consider your role in the family financial arena. Are you the only one who brings home the bacon to a family of four or more?

Or do you and a spouse both earn with no kids to worry about (dual income no kids)?

If you are the sole breadwinner, you will need to replace your income. How long it needs to be replaced may depend on whether or not you have children, and if so, their current age. Think longer the younger they are.

Also consider to what degree your spouse would be able to provide income in your absence…don’t forget childcare if you picture your spouse going back to work full time!

Bottom line is you will need your income multiplied by how many years you believe it will be necessary to sustain your family’s current standard of living.

Don’t forget to factor for inflation in the future and take into account any gains on investment of the paid out sum (it’s not a good idea to put the money in a checking account or under your mattress). Assume 8-12% investment income.

For example: You earn $50,000 per year and will want to replace your income for a total of 10 years until your youngest is off to college (which is discussed next).

Write down $500,000. Add your yearly gross income to this number as an inflationary guide. You’re now at $550,000. Multiply this number by the 8% expected investment return and subtract that $44,000 to arrive at $506,000.

Don’t Forget About the Future!

Finally, you’ll want to have enough money to cover your future obligations. You can get as crazy as you want in this section of your analysis.

You may need to revisit the college situation we discussed above, or perhaps you promised your youngest daughter a fairytale wedding, complete with a white horse at a castle in England (what were you thinking?). Either way, your death benefit should include these items.

For example:

You intend to send your two children to a reasonably priced four-year college.

You estimate $8,000 per semester/child. So you’re looking at $32,000 per year for four years. Stop your hand from shaking and write down $128,000.

In total:

Loans/mortgages/debt: $355,000
Lost income: $506,000
College tuition: $128,000

All said and done, in this relatively reasonable scenario, you’ll likely want to purchase a $989,000 life insurance policy, or just round it up to $1,000,000.

As this example illustrates, it’s a great idea to have a life insurance policy once you consider the cost of living expenses and/or the financial burden you may leave behind in the event of your untimely death.