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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insu...

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Reviewed by Rachael Brennan
Licensed Insurance Agent

UPDATED: Apr 21, 2020

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How can you determine the exact amount of life insurance you need?

You’ll want to ensure that you get sufficient coverage, without overpaying for coverage you don’t need.

Continue reading to find out how much life insurance you really need:

Table of Contents:

How Much Life Insurance Do I Need?

The proper amount of life insurance coverage will depend on your REASON for purchasing life insurance.

Here are a few guidelines:

  • Income Replacement (for the “bread winner”) – 10x your income
  • Non-working Spouse – half the coverage of the working spouse
  • Key-Person Insurance for Businesses – 1-3x annual revenue the key employee is responsible for
  • Buy-Sell Coverage for Business – 1 to 1.5x current value of the business
  • Final expenses – $10,000 to $50,000 for funeral, burial, and debts

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Why Do Most Americans Buy Life Insurance?

Here are the top three reasons people buy life insurance:

  • To cover burial and final expenses
  • Help replace lost wages/income of wage earner
  • Transfer wealth or leave an inheritance

An increasing number of Americans are using life insurance as a supplementary retirement income vehicle.  In 2017, 52% of Americans said they would use their life insurance to supplement their retirement, compared to 38% in 2011.  (More on this below…)

Out of all the reasons to buy insurance above, the one we see most often is #1… people using life insurance to replace lost income in the event of death.

Life Insurance For Supplemental Retirement Income

You may be interested in life insurance NOT for its coverage, but to grow a cash value and future income stream.

If that’s the case, you’re less concerned about how much you need, and more concerned about the best whole life or universal life insurance policies for cash value growth and future income.

Life Insurance For Estate Planning

Now let’s say you have a large estate, and may need life insurance to pay for estate taxes or to provide liquidity to your heirs.

You’ll want to speak to an estate-planning attorney and CPA to calculate (and possibly mitigate) your tax liability upon death.

Calculating How Much Life Insurance You Need

Some additional considerations when determining how much life insurance you need are:

  1. Time Left until Retirement – Many peoples’ biggest asset is their ability to work and earn income. Since most breadwinners purchase life insurance to replace that lost income in an unexpected death, you should consider how long you need to or plan to work. If you only plan on working another 10 years, you may not need more than 10 years of life insurance coverage, and so on.
  2. Spouse’s Income Potential – If your spouse does not currently work, would he or she be able to if need be? What is his/her income earning potential based on experience and education?
  3. Consider Your Debt – It’s common to purchase life insurance to cover a mortgage, credit debt, or business loan. Consider how long the term of payments is. If your mortgage will be paid off in 30 years, do you really need whole life coverage? Why not just 30 year term?
  4. Consider Your Savings & Investments – If you are actively saving money, adding to your 401K or IRA, etc., and your debts are decreasing as mentioned in #3, your need for insurance may greatly diminish in a short period of time. Please consider all of the above when determining how much life insurance you need.

Inflation & Interest

Let’s say you determine that if you were to pass away today, your spouse would need $500,000 of life insurance coverage.

Well, here’s the problem…

Due to inflation, your spouse may need twice the amount as today if you passed 15 years from now.

Next, factor in the interest your beneficiary will earn on the death benefit proceeds.  As long as we assume your spouse won’t “stick it under the mattress”, we can assume they’ll earn some interest on the money, right?

And by adding this interest to the calculation, your spouse’s money will last longer, meaning you may be able to get by with less coverage.