Life Insurance: How Much Is Enough?

Having sufficient life insurance coverage is crucial for your family's financial well-being in the event of your death. However, determining the appropriate amount of coverage can be complicated.

Rather than using an arbitrary formula, you may want to conduct a needs analysis, which incorporates an evaluation of your family’s most important financial obligations and goals. It can help you plan to address mortgage debt, college expenses, and funds for your family’s future, as well as liquidity for meeting potential estate tax liabilities with life insurance coverage.

Mortgage Debt

You may want to consider whether your life insurance proceeds will be sufficient to help pay the remainder of the mortgage on your home. If you are carrying a large mortgage, you may need to increase your life insurance coverage. If you own a second home, you may also want to factor that mortgage into the formula.

Estate Taxes

Life insurance has long been recognized as a method for establishing liquidity at death to pay estate taxes and maximize asset transfers to future generations. Be sure to consult your qualified tax and legal advisors to help ensure the desired results.

College Expenses

The amount needed to help cover your children’s undergraduate college and/or graduate school expenses can be roughly calculated by matching the ages of your children with projected college costs adjusted for inflation.

Because it may be difficult to project costs that far into the future, it's important to revise this calculation periodically as your children get closer to college age.

When estimating long-term savings goals, it may also be a good idea to be as conservative as possible.

Your Family’s Lifestyle

The amount you may need to help provide for your surviving spouse and dependents will vary according to your age, health, retirement plan benefits, Social Security benefits, and other assets, along with your spouse’s earning power.

Many surviving spouses may already be employed or will find employment, but your spouse’s income alone may not be sufficient to cover your family’s current lifestyle. Providing a supplemental fund can help your family maintain its standard of living in the event of your death.

Needs Analysis

If your existing resources are insufficient to cover your financial needs and obligations, the difference between your total assets and your total needs may be funded with life insurance. Consider the following when completing a needs analysis:

• What are your estimated Social Security benefits at retirement?
• How do you “inflation-proof” your family income, so the real purchasing power of those dollars does not decrease?
• What is the earning potential of your surviving spouse?
• How often should you review your needs analysis?
• How can life insurance help provide resources for your retirement?
• How do you structure your estate to reduce the impact of estate taxes?
• Which of your assets are liquid and which would not be reduced by a forced sale?
• Which of your assets would you want your family to retain for sentimental reasons or future growth possibilities?

As you evaluate your insurance needs, remember to assess your existing policies. Calculate the additional coverage you may need based on your family’s financial obligations and any other resources, such as retirement benefits and personal savings. Planning now may help to protect your family’s financial future.