Who Needs Life Insurance and How Much is Enough

Do I Need Life Insurance

One primary purpose of life insurance is to provide a source of income for your children, dependents, or other beneficiaries in case of your death.  In addition, estate planning needs, business continuation assurances and debt completion such as mortgages and business loans make life insurance a practical necessity. 

Families or single parents with young children or other dependents; the younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to continue salary replacement. If the family cannot afford to insure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on.

Adults with no children or other dependent; if your spouse could live comfortably without your income, then you will need less insurance than if your spouse was fully dependent on your income. You will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse. If financial hardship or inadequate savings could prevail, more coverage may be necessary.

Single adults with no dependents; you will need only enough insurance to cover burial expenses and debts, unless you want to use insurance for estate planning purposes or debt completion.

Children; generally need only enough life insurance to pay burial expenses and medical debts. In some cases life insurance policies are used as a long-term savings vehicle to provide for income down the road or college planning needs.

Retirees; there is less of a need for life insurance after retirement, unless it is for estate planning purposes. You may need to provide an income for the second spouse to die if your retirement assets are not large enough. Further, you will need some insurance to pay burial expenses, final medical costs, and debts. 

Business Owners; continuation planning is a strategy that helps avoid problems that can occur when a business owner retires or dies. A life insurance funded business continuation plan provides a wide variety of benefits for your family and the business.  Strategies such as Key Man and Buy / Sell agreements insure the flow of your business.

How Much is Enough 

Good question! And not an easy one to answer. Circumstances, such as pre-existing medical conditions or tax-efficient estate planning, can significantly complicate the question of how much life insurance you need. The insurance industry throws out many different formulas and the Internet is loaded with financial calculators that can assist you with this question as well.

In basic terms, the life insurance beneficiary just gets one big check and two things happen to this check. First, immediate expenses are paid. Second, the remaining sum is invested so that replacement income can be created on an ongoing basis, from both the lump sum and the investment income it generates

There are generally two methods of determining how much is enough:

1) Income Replacement needs
2) Need Fulfillment.

The Income Replacement Method assumes that the purpose of insurance is to replace the paychecks that you would have brought home to your family. By contrast, the Needs Fulfillment Method assumes that the purpose of insurance is to meet family needs. The amount of insurance required to satisfy these needs may be more or less than the amount of insurance required to replace your income.

So which method should you use? The most cautious approach would be to analyze your insurance needs using both methods, and then to compare the results. Most people want to be sure that they have at least enough coverage to meet family needs.  A general rule of thumb is to obtain approximately 6 times your annual income. 

Some financial planners advise obtaining enough coverage to eliminate your current debt and providing for the needs of your family while others suggest obtaining coverage to eliminate your total debt. Still others feel that the purpose of insurance is to replace your earning power, not to leave your family with a clean slate.

The best option is to find a good financial planner or a knowledgeable insurance broker to determine precisely what your needs analysis are right now and in the future. 

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