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how much life insurance do you need


When we are assisting clients in building their personal financial plan, inevitably one of the most frequent questions that comes up is: “How much life insurance should I have?”  It’s an important question to ask because if something unexpected were to ever happen to you or your spouse, it could put your family in a very difficult financial situation.  To help mitigate this risk, people buy life insurance to guard against this type of unfortunate event but it’s important to know how much life insurance protection you should have. If you have too little, the coverage might not be enough to meet your family’s financial needs. If you have too much, you might be wasting money on insurance that you don’t need.


In this article we’re going to go over the top 8 variables that factor into how much life insurance you should have, as well as, what type of insurance might make sense for you.


#1:  Amount of Debt


First, you should tally up the total value of all of your outstanding debt.


  • Mortgage
  • Student Loans
  • Credit Cards
  • Car Loans
  • Any other debt…………..


If you have dependents and something were to happen to you, the goal is to minimize the future annual expenses for your family.  If you are married and you are used to having two incomes in the household to pay the mortgage, student loans, and car loans, if one spouse passes away, the family loses that income stream and it could be very difficult to meet the monthly payment on the debt with only one income.  The life insurance would payout at the death of the insured spouse and those proceeds can be used to wipe out all of the debt which in turn reduces the monthly expense burden on the family.


#2: Income Level of Each Spouse


If you are married, the income level of each spouse will factor into how much life insurance each spouse should have.  If spouse 1 makes $200K per year and spouse 2 makes $40K per year, typically you will need more insurance on spouse 1 than spouse 2.  If Spouse 1 passes away, over the next 5 years, that’s $1 million in income that would need to potentially be replaced ($200K x 5 Years). However, if spouse 2 passes away, there would only need to be $200K to cover the next 5 years of income ($40K x 5 years).


A common mistake that married couples make is they blindly go in and purchase two insurance policies with the same death benefit without taking the different income levels into account.  For possibly the same combined premium amount, in many but not all cases, couples can be better served by shifting more of the insurance coverage to the spouse with the higher income.


#3:  Future College Expenses


If you have children and you expect those children to attend college, if you do not expect to receive large amounts of need based financial aid, it’s important to factor in future college expenses into the amount of the insurance coverage.   If you have 3 children and you planned on paying for their first 4 years of college, assuming college tuition with room and board is $25,000 per year, that’s $100,000 per child, multiplied by 3, for a grand total of $300,000 in anticipated college costs.


#4: Household Expenses


Everyone has a different lifestyle.  One couple that has a combined income of $300,000 may need $250,000 to support household expenses if one of the spouses were to pass away.   But another couple making the same $300,000 per year may only need $150,000 per year in income to support the household if one of the spouses passes away. You have to determine how your annual expenses would be impacted based on the untimely death of each spouse.


#5:  Outside Savings


The amount of wealth that you have already accumulated absolutely factors into the amount of insurance that you may need.  For example, if you sold your business and have $2 million in cash and non-retirement investment accounts, you may essentially be self-insured, meaning if something happened to you, you have accumulated enough savings to meet all of your family’s future financial needs without the need for additional insurance coverage.


However, if you and your spouse are both below the age of 50, have 2 children, and all of your wealth is tied up in 401(k)’s or retirement accounts, if you or your spouse were to pass away, the surviving spouse would have to withdrawal that money from the retirement accounts to meet expenses and pay tax on those distributions. So that $200,000 in their 401(K) may only be $150,000 after the taxes are paid but it depending on your tax bracket.   By comparison, personal life insurance policies that you pay for out of pocket, the insurance proceeds are received tax free when paid to your beneficiaries.


So it’s not just a question of how much you have accumulated but also how accessible are those assets to your beneficiaries if they need to use those assets to supplement their income.


#6:  Retirement Savings


You also have to consider the impact of an untimely death of a spouse on your retirement projections.  If you or your spouse are covered by an employer sponsored retirement plan, like a 401(k) or 403(b), your retirement projections probably have you both making those regular annual contributions up until your retirement date.  If one spouse passes away, those retirement contributions that were supposed to be there, no longer will be, which could force the surviving spouse to work longer than they wanted too.


You have to pay close attention to individuals that have pensions.  Some pensions require the employee to turn on their pension benefit to reserve the survivor benefit for their spouse.  If the employee passes away prior to their pension start date, the generous pension benefit which the family was depending on could be replaced by a much lower lump sum death benefit.   In addition, retirees that elect a pension benefit with no survivor benefits to their spouse will sometimes use life insurance to cover the risk that they pass away and the pension stops within the early years of retirement.


#7:  Adult Children with Disabilities


For families that have adult children with disabilities, it’s not uncommon for the parents to be providing some form of continued financial support for their disabled child for the duration of their adulthood.  If the parents were to pass away, the concern is that there has to be enough assets inherited by the child to provide them with support for the remainder of their life.  Parents will often set up a Special Needs Trust to serve as the beneficiary of these life insurance policies so if the policies do payout it does not jeopardize the Social Security, Medicaid, Medicare or other government assistance that the disabled child may be receiving.


#8:  Estate Plan


For some clients, it’s part of their estate plan that no matter what happens they want to know that $500,000 will go to each child, their favorite charity, to a trust for their grandchildren, or for clients with larger estates to pay the anticipated estate tax.  To guarantee that those amounts will be available to meet their estate wishes, individuals can purchase permanent life insurance that will payout at the death of the insured.


Case Study


Let’s run through a simple example given the following fact set:


Spouse 1 Income:  $200,000  (Age 30)

Spouse 2 Income;  $50,000   (Age 31)

Children:  Susan Age 4 and Rebecca Age 2

Mortgage:  $250,000

Student Loans: $20,000


The couple above has the college savings goal to pay for the first 4 years of the kid’s college expenses which is anticipated to be $25,000 per year.


Total Debt:  $270,000

Total Estimated Future College Expense: $200,000 ($25K per year for each child)


From an income replacement standpoint, we would be looking to provide this family with a minimum of 5 years of income replacement.  For the coverage on Spouse 1 that would be:


$200K Annual Income x 5 Years = $1M

Total Debt and College Costs =   $470K

Total Insurance Coverage on Spouse 1:  $1.5M (round up)


For the coverage on Spouse 2 that calculation would be:


$50K Annual Income x 5 Years = $250K

Total Debt & College Costs = $470K

Total Insurance Coverage on Spouse 2 = $750K (round up)


How Much Does Insurance Cost?


In general, term insurance is cheap and permanent insurance is more expensive.  For 90% of the individuals that we work with for their financial plan, term insurance typically makes the most sense.  To give you an idea, a $1M 30 Year Term policy with William Penn Insurance Company, for an individual with the following fact set:


  • Age 30
  • Gender: Male
  • Resident of New York
  • Non-Smoker
  • Preferred Health Class


The monthly premium would only be $70.46 per month as of July 2020.


New York Residents: We Can Help


Michael Ruger & Rob Mangold are independent insurance agents which means we are not tied to a single insurance company. If you are a resident of New York, we can consult with you, help you to determine the amount of insurance that you need, evaluate you current life insurance coverage, and run free quotes for you across the major life insurance carriers in NY to determine the most appropriate carrier for your insurance policy.  Contact Us


Michael Ruger

About Michael………

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

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Investment advisory services offered through Greenbush Financial Group, LLC. Greenbush Financial Group, LLC is a Registered Investment Advisor. Securities offered through American Portfolio Financial Services, Inc (APFS). Member FINRA/SIPC. Greenbush Financial Group, LLC is not affiliated with APFS. APFS is not affiliated with any other named business entity. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.