How Much Life Insurance Do You Actually Need?

"How much life insurance do I need?" is the question I hear most often. It usually arrives with a number already attached.

That number came from somewhere. A friend's policy, an ad that landed in a bad week, or a rule someone half remembers. None of those know anything about your household.

There is no magic number. But there is a way to work it out, and it takes about twenty minutes with a pen.

Start with the paycheck

Life insurance replaces a paycheck. So start with the paycheck.

Take what your family actually lives on in a year. Use take-home pay, after taxes come out.

Then decide how many years that money would need to keep coming. Until the youngest finishes school is one common answer. Until the mortgage is paid off is another.

Say your family lives on $90,000 a year and would need that income for twelve more years. That comes to $1,080,000, before anything else is added.

People find that number startling. It is also the honest one.

You will hear a shortcut: buy ten to twelve times your salary. It is a decent way to check yourself. It is a poor way to decide.

The middle American household earns $83,730 a year, according to the Census Bureau's 2024 figures. Twelve times that comes to almost exactly one million dollars. The shortcut is built for that household. If yours earns more, or less, it was never built for you.

Add what would still have to be paid

Next come the debts. Use the balance you still owe, not the monthly payment.

The mortgage. The car loans. Anything else you would not want to leave behind for someone else to sort out.

Then add the things you plan to pay for. If you want to cover college for two children at $60,000 each, that is $120,000. It counts even if the money is not saved yet.

Last come funeral costs. A funeral with a viewing and a burial cost about $8,300 in 2023, according to the National Funeral Directors Association. Some parts of the country run higher. It is a small amount next to the others. It also arrives first, in the same week as the grief.

Subtract what you already have

Most people skip this step, and it usually works in their favor.

Start with the policy at work. Count it, but read it first. Coverage through a job is often one or two times your salary, and it almost always ends when the job does.

Then count the savings and investments your family could really use. Then any policy you bought yourself.

Put the whole thing together for that household:

• Income to replace: $1,080,000
• Mortgage still owed: $240,000
• College for two children: $120,000
• Funeral costs: $15,000
• Total needed: $1,455,000
• Less the policy at work: $250,000
• Less savings: $80,000
• Real gap: about $1,125,000

People get this wrong in both directions

Plenty of families are heavily insured on things that barely matter. The same families are badly underinsured on the things that would actually break them. I have seen a small policy on a child, bought years ago, while the parent earning the money carried almost nothing.

Being under your number is not a failure, and most households are. Think of the number as a target rather than a test. Covering the most important part now and adding to it later is a real plan, and it is what most people actually do.

It changes, so look again

The right number when your first child arrives is the wrong number later. By then the mortgage is half paid and a second child is on the way.

So look at it again when your life changes. Do not set it once and forget it.

The math is simple. Running it on your own life is the twenty minutes that matter. The answer will be worth more than any number you could borrow.

If someone you know is about to buy a policy based on a friend's number, pass this along.

If you would like to run these numbers on your own household, I am happy to walk through it with you.