How To Calculate How Much Life Insurance You Need


It’s Life Insurance Awareness Month! I’ll be you weren’t aware of that. It’s ok, neither was I until this morning.


In honor of Life Insurance Awareness Month, I am going to finish off the month talking about…


Yep, you guessed it! Life Insurance!


Common Rule Of Thumb

If you’re reading this blog, you probably already understand the value of life insurance. You want your family taken care of if anything happens to you. You already know the why. Your big question is probably more along the lines of how much. How much life insurance do I need?


Dave Ramsey will tell you 10-12 times your annual income. He has millions of people who listen to him, so he needs a quick rule-of-thumb that will get people close to what they need without getting them in trouble.


If you want to follow Dave’s advice and stop there, that’s great. You will be well ahead of your peers. After all, less than 4 in ten Americans even care about life insurance at all.


More Personalized Calculations

However, if you want to go a step further and get more personal, that’s even better. Dave can’t analyze the personal needs and unique situations of 13 million listeners. But you can analyze your own needs.


There are multiple factors that go into calculating life insurance needs. They can be classified as either immediate needs or long-term needs. The immediate needs are easy to calculate. The long-term ones are more complicated. However, by utilizing online calculators, you should be able to come up with a number that will serve your purposes, even if it isn’t as exact as you could get from a financial professional with sophisticated software.


Factors That Affect Life Insurance Needs

Here are the main factors that will affect your life insurance needs, broken down by whether they are long-term or immediate:



Total Income Needed

How much money does your family need to live off of? Look at your budget. What expenses will disappear with your passing? What new expenses will arise without you? Estimate your family’s needs based on your current expenses.


Length Of Time Income Needed

How long will they need that income? Will there be a point where your spouse’s income will start to cover family expenses? When do you think your kids will be financially independent? Life is not static, and therefore, neither are income needs.


Current Assets

What do you already have built up to work with? If you already have emergency savings, retirement savings, and college savings, you will need less insurance than if you didn’t.


Expected College Expenses

Do you want to fund a college education for your children? Make sure you have enough life insurance to do so! The age of your kids and the kind of school they want to attend will determine how much you need to set aside.



Current Mortgage

How much do you owe on your house? You want enough life insurance money to pay off your mortgage so your family owns the home free and clear. Not having a mortgage will give them peace of mind and also lower their monthly expenses.


Other Debts

What debts would you like your life insurance to pay off besides your mortgage? Student loans, credit cards, car payments, it would be nice for your family to no longer have to worry about any of them.


Medical Bills

Death is rarely free. Even if you die suddenly in an accident or from a heart attack, you will still probably incur some expenses, such as ambulance bills. Chances are, though, you’ll get sick before you die. Getting sick can be expensive, even with health insurance. Have enough life insurance to pay off your medical bills so your family doesn’t have to worry about them and can find closure.


Funeral Expenses

It can be expensive to wrap up a life. Make sure to include enough in your life insurance to pay for your funeral and burial expenses.


Sample Calculation

So, how do you figure all of those things out to come up with an actual number? Let’s do it. Here is your fictional situation:

  • You have a wife who stays home with the kids but will go back to teaching and can support herself once the kids are in college. She will receive a full pension from that job.
  • You have twin 8 year-olds who want to go to a state university when they are 18.
  • You earn $60,000 a year and take home $50,000.
  • You owe $200,000 on your house and have a monthly payment of $1,167.
  • You owe $8,000 on a minivan, $4,000 on a student loan, and $1,500 on a credit card.
  • You have a fully funded emergency fund and $2,000 set aside for each of your kids for college.
  • You want to prepare for $40,000 in medical bills and an $8,000 funeral and burial.


Immediate Needs

Let’s start with the easy part and calculate your immediate needs. Here they are:


Debt/Expense: Amount Needed:
Mortgage $200,000
Car Loan $8,000
Student Loan $4,000
Credit Card $1,500
Medical Bills $40,000
Funeral & Burial $8,000
Total $261,500


Long-Term Needs

Long-term needs are a little harder to calculate because you are making calculations based on an unknown future.


Let’s start with college expenses. You already have $2,000 per kid saved and you have 10 more years before the money is needed. The average state university today costs $10,000 per year, and that’s the kind of school you want to pay for. When you plug your numbers into this handy calculator, you will find that you need a lump sum of about $30,000 per kid to meet your goal.


Next, what kind of income will your family need? Right now you take home about $4,167 a month and spend almost all of it. Without your mortgage payment, your expenses will drop to $3,000. Without your other debt payments, let’s say your expenses drop to $2,500. Your family will need $2,500 a month for the next 10 years until your wife goes back to work. I used a retirement calculator to discover that you will need about $272,000 to provide $2,500 a month for 10 years.


Total Insurance Need

So how much life insurance do you need? $593,500.


Need/Expense: Amount Needed:
Immediate Needs $261,500
College $60,000
Regular Income $272,000
Total $593,500


How does this compare to Dave Ramsey’s rule of thumb? He would recommend $500,000 to $720,000, depending on whether you use your gross salary or take-home pay for your calculations. Pretty close, huh?


Ok, now that you see how it works, go do your own calculations. Or take the easy route and purchase 10-12 times your income. Or even use Dave’s own calculator. No matter how you find your numbers, show your family that you love them by preparing for the future!



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