How much life insurance coverage do I need?

Life Insurance Calculator

How do you answer the life insurance question: "How much life insurance do I need?"

When determining a sufficient amount of insurance and life insurance coverage type, some individuals use the "multiple of earnings" method. Here's an example: someone earning $40,000 per year could evaluate that they should have insurance equivalent to eight times her salary equaling $320,000. This is a simple method but it has shortcomings if you use a multiple that's too low. See the multiple of earnings method below.

Another way to determine life insurance coverage amounts is called "Human Life Value." This is the method that is often used in courts to award judgments in wrongful death lawsuits. While Human Life Value can be more complex to calculate than "multiple of earnings," it is considered a more accurate estimate of the amount of money you should have to replace future earnings – your human life value.

Human Life Value: An Example

Three ways to do this:

1. Use an interest rate and calculate. We’ll explain

2. Use a simple multiple of earnings – easiest and fairly accurate

3. Go through the full exercise

4. Go to a full human life value calculator

1. Use an interest rate.
Here’s what you do. First, estimate an interest rate that your family could earn with little or no risk. Let’s use 5% for the example. Then take your income and divide it by the interest rate. Example: Income of $100,000 divided by 5% = $2,000,000 human life value. Let’s prove it out: $2,000,000 x 5% interest = $100,000, a full replacement of income (not including inflation).

2. Multiple of earnings
A simpler way might be to verify your Human Life Value by applying the simple underwriting guidelines like the ones that life insurance companies frequently use to suggest proper amounts of coverage. Here is a common guideline:

Based on the example above, if you made $100,000 and you’re age 35 the insurance amount calculated would be $2,000,000 (20 times salary). This supports results obtained in the Human Life Value calculation.

3. The full exercise
Get ready, this is a little complex. To just see the bottom line, go to sections one and two above. Human Life Value is defined as the present value (the value today) of future income that you could expected to earn in your lifetime.

Example: Sally is age 35 and she plans to retire at age 65. She currently earns a salary of $50,000 per year. She also runs the house and it would cost an additional $15,000 per year to replace that work with a housekeeper. Sally's total value to her family at age 35 is determined through the following life insurance calculator example:

80% of her $50,000 salary $40,000
Non-wage value $15,000
Her total value at age 35 $55,000

Next you could also get more technical and adjust this $55,000 for inflation over the next 30 years, until she plans to retire. At a 3% rate of annual growth, her value would increase to $99,336 by age 55.

If you want further help or are still asking the question "how much life insurance do I need?", you can contact us by email or call us at 866 691 0100

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