How Much Life Insurance Do You Need?

How Much Life Insurance Do You Need?
by Marilyn Katz


Life Insurance Needs Analysis is an important step for your financial planning. Even if you sit down with a professional financial planner or insurance agent, you should have some idea of what factors are used to calculate your suggested death benefits. I find that the more informed that consumers are, the more they were satisfied with their purchase decisions. It may take more conversations with informed clients to actually settle on a deal, but those deals tended to stick.

When I worked as an insurance agent, one of the most common things that clients wanted to know was how much life insurance they might need. Of course, as an agent, I had to balance an ideal figure against the cost of the premium. I knew that I needed to offer them enough life insurance to really protect their family. But if I suggested a premium rate that would not fit into their budget, then they would either refuse the policy or cancel it later. I always tried to get some idea of how much money the felt comfortable with spending.

I did write a script for a simple life insurance needs calculator. I took into account a year's salary, funeral expenses, existing debt, and planned future events like college tuition. Of course, any financial planning should include some emergency money too, so I fitted that in.

My life insurance needs estimates were actually fairly conservative, and many other financial professionals and insurance agents thought I should double them. Even with my conservative planning formula, many families were surprised. Of course every family has different needs, and any formula should only be a starting point for discussion and analysis.

For instance, part of a family's debt may the payments on a second car. They would not need that car if one spouse passed away so they could eliminate a payment. On the other hand, if one spouse did not bring in any income, one year's income may not be enough to help the family get back on track.

I think the life insurance needs calculator is a useful tool, and helps present a graphical image which many people enjoy. However it is not the only tool, and doesn't replace personal calculations.


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