How Much Life Insurance is Enough? 

Written by Canty Financial - Published on June 23, 2023

This is a question we are asked frequently by clients. How much life insurance is enough will vary greatly depending upon your situation. We will discuss some of the factors that you should consider in making this decision. 

What Financial Obligations Do You Need to Cover? 

The first thing to keep in mind is that the main purpose of life insurance is to replace income or build assets in the event of your death. 

The best way to estimate how much life insurance you need is to take an inventory of the financial obligations that you would like to be able to cover in the event of your death. These will vary based on your unique situation, but here are some common examples we see in working with our clients: 

  • Income replacement: This is generally some or all of your salary or other income for a period of time. For example, if you feel that you need to replace $150,000 in salary for 15 years, this equates to a death benefit of $2.25 million.
  • Paying off a mortgage: If you have a mortgage on your home you may want the death benefit to cover the balance in the event of your death.
  • Other debt obligations: Does your family have other debts that they would struggle to pay off in the event of your death? These might be student loans, debt related to the purchase of a business, or other obligations. A life insurance death benefit can be used by your beneficiaries to pay off these types of debt obligations.
  • Medical expenses and burial costs: In the event of a long illness, you might leave medical expenses not fully covered by your health insurance that could be obligations of your spouse or other heirs. The life insurance death benefit can cover these costs plus any funeral expenses for your burial.
  • Funding a business buyout arrangement: For those who are business owners, a buy-sell arrangement might be used to buy out the owner’s interest in the business in the event of their death. The remaining partners may buy out the deceased owner’s interest in the business from their heirs using the proceeds from the life insurance policy.

These are just some examples of the types of obligations you may want to cover via a life insurance death benefit for your beneficiaries. 

Consider All of Your Assets 

Part of the calculation of how much life insurance you may need is taking your other assets that could be passed on to your heirs upon your death into consideration. Everyone’s situation is a bit different, but some examples could include: 

  • Cash in a savings, checking, or money market account.
  • Investments held in an IRA or a company retirement plan like a 401(k).
  • Investments held in taxable accounts.
  • Real estate, including investment properties
  • Life insurance provided by an employer
  • An employer pension
  • An annuity 

These and other assets can be used to fund the needs of your family or other heirs. These assets should be taken into account in your estate planning process and in deciding how much is needed in terms of a life insurance death benefit to meet their needs. 

Other Factors to Consider 

Whether you need life insurance and how much coverage will depend on a number of other factors.  Among these are: 

Age. We find that younger clients generally need a larger death benefit, especially if they are married and have children. They typically have not accumulated enough assets elsewhere to provide for their family in the event of their untimely death. 

On the other side of the coin, clients in their 60s or older may not need any life insurance or may need a lower death benefit. Their kids are generally grown and they have accumulated other assets to pass on to their heirs and beneficiaries. 

A key question is do you have beneficiaries who will need financial support upon your death? If you are single with no dependents the answer may be no. Likewise, if you are financially independent and have sufficient assets to leave to your spouse and other heirs. 

One nice benefit of life insurance is that the death benefit passes to your beneficiaries tax-free. The tax-free nature of the death benefit will be appreciated by your beneficiaries.

Depending upon the nature of your other assets, a life insurance death benefit can be a good addition to your estate. 

What Type of Life Insurance Policy is Best? 

While there is no single right answer here, we generally recommend that our clients strongly consider term life insurance. We like term insurance as the premiums are generally cheaper and there are generally no hidden costs as is sometimes the case with permanent life policies. You are only paying for a death benefit and not some underlying investment option that may or may not be a good deal for you.  

The other reason we typically recommend term life is that we find that many clients don’t need the death benefit as part of their estate planning as they move into retirement. Most have built up enough assets including investments, real estate, and in some cases their interest in a business where they are now considered "self-insured" and can live off of their accumulated assets instead of needing a large payout from life insurance.

For help in deciding on the amount of life insurance coverage that you need please feel free to reach out. We can help you incorporate life insurance into your financial and estate planning. 

Bill Canty, CFP®, CPA

Ed Canty, CFP®, Investment Advisor

Joe Canty, Investment Advisor

Maureen Walsh, EA, Tax Advisor

Tina Alteri, CPA, Tax Advisor

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