How Much Life Insurance Do I Really Need?

May 6, 2025

Your loved ones rely on you, but what if something unexpected happens? If you’ve ever wondered why you should even consider buying life insurance, the main reason is to protect your loved ones in the event of your death.

Now the question is, how do you assess your insurance needs to provide peace of mind for those you love?

This blog will walk you through the essentials of life insurance and how to determine the right amount of coverage for you.

Why You Need Life Insurance?

Life insurance is a safety net, providing a tax-free death benefit payout to your beneficiaries upon death. This money can be used to replace lost income, cover debts, and keep your family financially stable.

For business owners, there are many innovative strategies that business owners can use life insurance for. Certain types of life insurance provide more than just a death benefit and can help with complex estate and tax planning needs. They can also be used as an investment vehicle to grow your money tax-deferred, making them a tax-efficient retirement planning tool.

Finding the right type of life insurance for you depends on your needs and goals.

Understanding the Different Types of Life Insurance

There are two main types of life insurance: term life insurance and permanent life insurance.

Term Life Insurance

Term life insurance provides a death benefit if you pass away during a specific period or “term.” It is straightforward and inexpensive. This is a great way to get protection for the business and family during key financial stages, like paying off a mortgage.

Permanent Life Insurance

Another kind of insurance is permanent whole life insurance, which covers the insured’s entire life and pays out a death benefit when the insured passes away.

It also includes a cash value component that grows tax-deferred over time. When used correctly, this is an investment aspect of the insurance that business owners can use to build long-term wealth.

Think of permanent insurance as more of an asset than an expense because it grows your corporate dollars tax-deferred, and there are ways for you to access that money tax-free.

How to Calculate How Much Insurance Is Right for You

To find out how much life insurance coverage you need from a risk standpoint, there are five tips to consider in your calculation:

Income Replacement: Calculate how much income your family would need to maintain their lifestyle when you pass away.
Debts and Expenses: Calculate any outstanding debts, such as mortgages, lines of credit, loans, or credit cards, as well as big future expenses like the cost of a funeral.
Financial Goals: Include financial goals such as education funds or retirement savings for your spouse and dependents.
Existing Savings and Investments: Evaluate your existing savings, investments, and other sources of income that could provide financial support to your family.
Length of Coverage Needed: Determine how long your family will need financial protection, considering factors like children becoming financial independent or paying off debts.

Here’s a client example of how the five step calculations would play out:

Isabel and John have two children, ages 2 and 4.

Income: John earns $100,000 per year, and Isabel earns $200,000 per year.
Debts and expenses: They have a $1,000,000 mortgage. They spend about $200,000 annually, $50,000 of which is to pay down the mortgage.
Savings and investments: They have $600,000 in savings.

If Isabel were to pass away tomorrow, what would the financial impact be on John and the kids? Here’s what we would recommend using the calculations:

First and foremost, John and Isabel need to get $1,000,000 in coverage for the mortgage.

Now, let’s consider income replacement, financial goals, and savings. If Isabel were to pass away, there would be $200,000 less income in the household per year.

Since the family spends $200,000 annually and we’ve decided to get enough coverage to pay down $50,000 per year towards the mortgage, we are left with an income shortage of $100,000.

John figures that in 20 years, on top of the $600,000 in savings, he’ll have enough saved for retirement, the kids will be able to start taking care of themselves, and he will be fine living on $100,000 per year.

Based on the considerations above for the next 20 years, requiring $100,000 a year, and taking into account the time value calculation of money, it’s recommended Isabel get $3,000,000 in coverage to insure her risk.

It’s important to note that life insurance is not a one-size-fits-all solution. Everyone has different life insurance needs depending on their goals and how they want to protect their family and loved ones.