How Much Life Insurance Do I Really Need?

Ty Stewart - Founder - Written by Ty Stewart - Last Updated October 18, 2018

Soooo many numbers, theories, models, and insurance agents telling you different things.

This article will simplify it and help you figure out how much life insurance you actually need. An unbiased independent agent should be able to help you with this. However, consumers are best equipped to always be treated fairly if you understand the basics on your own first.

How NOT to Determine Life insurance Needs

The income multiplier method, don’t use it! 

This method says to multiply your yearly income by 5 or 7 or 10 times and that is how much coverage you need. It’s often called a “general rule of thumb“.

I truly cringe when I hear this. Let’s take a quick look at how WRONG this calculation be.

Andrew and Frank are both 44 years old and make $65,000 per year. If we use the 10 x your salary method, they should get $650,000 in coverage each.

Digging just a little deeper without getting too complicated, we find out that their incomes and ages are the only similarities between them. They both like sausage on their pizza too but we don’t need to worry about that.


  • Has no children
  • Andrew’s wife has a successful dentistry practice and makes $200,000 per year.
  • The house they live in was passed down from Andrew’s father. There is no mortgage on it.


  • Has 3 children, ages 2,4,7.
  • Frank’s wife does not work and stays home to raise the kids.
  • They have 25 years and $322,000 left owing on their mortgage currently.

If both Andrew and Frank die tomorrow in a car accident, which family will be in more trouble financially? Therefore, who needs more life insurance?

It’s not even close. Obviously, it’s Frank who has a MUCH higher need for more coverage to make sure his family is protected.

You get the point. To determine adequate coverage, we need to look at each person individually. Life insurance is NOT a one size fit’s all solution. That is why we say to ignore the “rule of thumb”

The Right Way to Determine How Much Life Insurance You Need

So we have discussed why NOT to use an arbitrary number. Then how do you figure out the right amount of coverage?

Life insurance is meant to replace an income that is lost when a human life is lost.

Put very simply…

The financial value of that lost life = the right amount of coverage you should have.

In order to figure out the true impact, 2 questions must be answered:

  1. What are the immediate financial needs of the family or beneficiaries left behind?
  2. What are the long-term financial needs?

8 Step Process to Determine Coverage Needs

Step 1 – Take inventory of assets

  • Savings accounts – cash reserves, CD’s, 529 college savings plan account, etc
  • Retirement accounts – 401(k), IRA, Roth IRA, company pension, etc
  • Other investment accounts
  • Spouse income
  • Estimated Social Security benefits
  • Existing life insurance policies – through an employer or purchased separately

Step 2 – Take inventory of debts

  • Mortgage
  • Credit card debt
  • Other loans – business, car, etc
  • Any unpaid bills – medical, taxes, etc

Step 3 – Determine immediate cash needs

In this step, add up what your beneficiaries will need in the first few months after your death.

  • Final expenses – funeral and burial costs
  • Loss of income due to grieving time away from work
  • Any of the above debts from Step 2 that have high-interest rates and should be paid off immediately.
Making it easy: If any of this gets too complicated, we endorse this life insurance needs calculator. It’s not our own but does follow the same process we take clients through to determine adequate coverage needs without being over-insured. Even if you decide to use the calculator, we suggest reading through the process to understand it. Any questions at all, we are always happy to help.

Step 4 – Figure out long-term financial needs

  • Replacement of lost income from the person who passed on
  • College tuition savings
  • Retirement savings for surviving spouse
  • Additional new expenses that would arise as a result of person being gone – a possible increase in child care, housecleaning, transportation, etc

Step 5 – Make assumptions about the future after you are gone

  • Rate of investments return
  • Rate of inflation
  • Spouse income growth
  • Desired retirement age for surviving spouse

Putting It All Together to Find out the Right Coverage Amount Needed

Assume you will die tomorrow for purposes of this exercise. Sorry if that is a little morbid, not trying to scare anyone here.

Tomorrow when you are gone:

Step 6 – What are the net assets (Step 1) your family is left with after subtracting the debts (Step 2)? This may be a negative number. First off, you will need enough coverage to bring that number back up to even if it was negative.

Step 7 – What are the immediate cash needs (Step 3)? If you were still positive from Step 6, subtract what was left from the immediate cash needs. This much coverage is needed right away.

Step 8 – What are the long-term needs of your beneficiaries? Use your list (Step 4) and adjust it based on future assumptions (Step 5). Carryover any needed coverage from Step 7 and add it to the long-term needs here.

If you have followed this process, you will now have an accurate picture of the financial value of the lost life. And therefore the answer to the question…

“How much life insurance do I really need?”

Please don’t be scared by this needs analysis exercise. The real intention of this article is for you to understand the process. Remember that you can always use the life insurance needs calculator we mentioned above. I hope this article served its purpose to cut through all the noise out there on this topic.

Now that you know how much coverage you need, make sure to get it at the lowest price possible by reading our 15 tips and tricks for finding the most affordable coverage.

If you ever have any questions, we are happy to discuss your situation and provide options. Always done with no pressure or obligation. And there is NEVER any cost to work with us.

At Simple Life Insure, we only sell life insurance so it’s our job to stay on top of all this for you.

About Ty Stewart
Avatar for Ty Stewart
Ty Stewart is the founder of He is an independent life insurance agent that works for his clients nationwide to secure affordable coverage while making the process simple. There is never any cost to use his services.

Posted in Life Insurance Basics