How am I supposed to know how much life insurance I need?

| February 20, 2017

Life insurance is one of those topics most people find uncomfortable to discuss. As a result, they don’t. The problem is that this lack of communication too often leads to families relying on a couple of flawed methods to determine how much life insurance they need.

There’s a Reason They Call it Group Life Insurance

One of the most common mistakes people make when it comes to life insurance is assuming that the coverage provided by their employer is sufficient to protect their family. The military provides a generous and inexpensive life insurance through Servicemembers’ Group Life Insurance (SGLI). There’s a reason it’s called group insurance, though. The amount of coverage is not based on your family’s specific needs. Everyone in the military – regardless of their unique circumstances and needs – is provided with $400,000 of SGLI. For those who have no dependents, it’s probably more coverage than they need. For those who are married and have several children, it’s probably not enough.

Be Wary of Rules of Thumb

Another common way that people decide how much life insurance they need is by applying rules of thumb. The most common of these suggests that you probably need an amount equal to 7 times your annual income. There’s a good chance this method was invented decades ago by someone in the life insurance industry who just wanted to make the buying process quick and simple. But that doesn’t mean it’s accurate. Applying a general rule of thumb is based on the same false assumption that relying on group coverage is based on – that everybody’s needs are the same.

Imagine if You Died

The only reliable way to make sure you have the right amount of life insurance is to imagine what would happen to the people who count on you if you died. That’s not a fun thing to – and that’s why people put it off and sometimes never get around to it. But it’s really not as bad as it sounds. There’s a reason it’s called life insurance, though it seems like it should be called death insurance. That’s because if anything does happen to you, the funds provided by your life insurance policy are there to ensure that the people you love will still have the opportunity to live the lives you want them to live. It’s there so that your children will still get to go to college and your spouse won’t have to sell the house or work a second job.

That’s why the only reliable way to figure out how much life insurance you need is to sit down together as a family and calculate the needs of the survivors if one of the family’s breadwinners should die unexpectedly. Will they need money to pay off the mortgage or other debts? What about money to replace lost income? Or money to pay for future education expenses?

Figuring out the right amount of coverage, in other words, isn’t a matter of estimation, it’s a matter of calculation. And if that sounds a little daunting or outside of your area of expertise, there’s a solution for that, too. Talk to a knowledgeable financial advisor who understands your benefits and is willing to take the time to help you calculate your family’s needs.

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