How Much Life Insurance Do You Need?

It is vital to ensure your financial plan identifies and defines your current financial situation and your financial goals, and provides a comprehensive path between the two. Most importantly, a holistic financial plan should not include a sales presentation. Unfortunately, many insurance and annuity salespeople commonly develop “financial plans” for their potential clients, but these documents are little more than a step-by-step explanation of why the product they’re selling is a perfect fit for that individual.

Insurance agents frequently come up with incredibly detailed (and confusing) documents to illustrate why their product is great for a potential purchaser. They have many “rules of thumb” to estimate how much life insurance a client needs. However, remember that an insurance agent’s compensation is a function of how much life insurance he can sell. Consequently, individuals are frequently sold more life insurance than they need.

How much life insurance would a fee-only financial planner, someone who doesn’t even have the ability to sell insurance, suggest you need? Likely, the fee-only planner would have a simple methodology that would enable the client to easily determine whether they are under or over-insured. Here is an example:

Suppose a couple determines that if the primary wage earner were to pass away, the other spouse would need $75,000 per year to maintain their standard of living. This non-wage earning spouse is 60 years old, and would like to have enough funds to support their lifestyle until reaching age 100. If we assume 3% inflation, the survivor will need approximately $2,147,778 to provide for themselves throughout their lifetime. In addition, we’d want to make sure this individual’s final expenses are taken care of, so we’ll add in $29,000, and we’ll also include enough funds to pay off the families debts – in this case $23,041 of credit card debt – bringing us to a total need of $2,176,778.

From this figure, we can subtract the sources of income the surviving spouse anticipates. For instance, this individual expects a lifetime total Social Security benefit of $361,066, and this person could also continue their part-time job, which is expected to produce another $71,314 of income over the survivor’s lifetime. Thus, after subtracting our anticipated sources of income we are left with a net estimated survivor needs shortage of $1,744,398.

Now, we can subtract out the assets we already have available to meet this shortage, such as retirement and bank accounts. We’ll suppose this couple has accrued $923,500 of assets to cover their retirement. After subtracted our accumulated assets from our survivor need, we come up with a figure of $820,898. This is the shortage that the couple will look to fill with life insurance. In this particular instance, the individual in question had a $1,000,000 term life insurance. As this analysis indicates, this individual is over insured by approximately $180,000.

It is important to conduct this analysis frequently. For every year an individual survives, the insurance need is reduced in two ways. First, the survivor will now need one year less of survivor benefit, and second, the primary wage earner will have produced one additional year of income. Consequently, insurance needs can decrease rather quickly.

About the author

Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as and (by The Wall Street Journal). Additionally, Lon is an expert author at Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or Learn more about Net Worth Advisory Group at and visit Lon's blog at

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