How Much Life Insurance Do You Need?

How much life insurance do you need

Photo courtesy of woodleywonderworks

Welcome to Part 2 of a four-part series on life insurance that will explain its importance and guide you through the process of purchasing a policy that’s right for you and your family. You can follow along with the entire series here:

Today’s post assumes you’ve already determined that you have a need for life insurance and that you’re now trying to answer the question of how much life insurance you need.

I have created a spreadsheet in Google Docs that will be a helpful tool as you work through this process. I will be referencing it throughout this post, so please open it up and follow along: Life Insurance Needs Worksheet.

FYI, this post is long. This is on purpose. This is not meant to be a quick read or a general overview. There are plenty of those online already and I found them to be incredibly frustrating when trying to figure this out for myself. I didn’t want rules of thumb. I wanted a step-by-step guide to help me determine my personal need.

Since I couldn’t find one that made any sense to me, I decided to create it myself. That’s what this is. It is meant to lead you step-by-step through the entire process of determining the amount of life insurance you need. It is actually the exact process that my wife and I followed when determining our insurance needs. The detail is meant to make it as easy for you as possible, so that you understand everything that should be done and how to do it.

My hope is that this can serve as your one and only resource for determining how much life insurance you need.

Summary of the steps we’ll take

Before we get into the detail, here are the steps we’ll be progressing through:

  1. Fill in your current budget.
  2. Project your income changes in the case that either parent dies.
  3. Project your spending changes in the case that either parent dies.
  4. Determine the amount of insurance you need to produce the required income determined by Steps 2 and 3.
  5. Outline your current debts.
  6. Determine lump sum needs and wants.
  7. Determine what will be covered by Social Security.
  8. Add any other savings available to cover your needs.
  9. Review your final amount and add 10%.

Step 1: Fill in your current budget

Okay, let’s get started. You should have your worksheet open so you can follow along. That link again is here: Life Insurance Needs Planner.

The first step is to fill in Column B of the “Budget” worksheet. This is simply your current monthly budget.

A couple of things to note here. First, the summary section at the top will populate itself as you fill out the other sections. You shouldn’t change them yourself.

In the income section, only include income that is actually used for regular expenses. A paycheck would be the obvious example here. An example of something not to include would be interest earned in a savings account. Although it’s technically income, it stays in your savings account and therefore isn’t available for regular expenses.

Also in the income section, include only net (after-tax) income. You could include your gross income, but then you would need to add a taxes section to the expenses. I find that it’s easier to just skip that step and only deal with net income, since it will come out to the same result.

Finally, you’re more than welcome to add budget categories that I haven’t included. You’re also not required to use all of the categories I have included. Make sure that it truly reflects your budget.

When you are finished entering your budget, double-check the summary numbers at the top to make sure that they are summing up correctly.

Step 2: Project your income changes in the case that either parent dies

Now that you have your current budget detailed, you need to project how your budget might change in the case that either parent dies. We will be doing this in Columns C and D of the “Budget” worksheet. I would recommend first changing the headers in Columns C and D to reflect the actual name of each parent. This will make it easier to keep track of what you’re doing.

The first step here is determining the change in income, which largely means determining the change in the paycheck received. Obviously, if a paycheck-earning spouse dies, that paycheck will go away. The less obvious consideration here is what will happen to the paycheck of the surviving parent.

If you’re currently married and you file jointly, then your paycheck likely won’t change much in the year that your spouse dies. But for every year after that, your filing status will likely change from Married Filing Jointly to what’s called “Head of Household” (assuming you have dependent children). This puts you into a different tax situation and will change your take-home pay.

Your filing status might also change to Head of Household if you were not married, but you would newly have custody of your children. If you are not married and you already have custody, then your filing status will likely not be changing, and your paycheck will likely stay the same.

Even if your filing status would not change, your paycheck might change if you would newly be enrolling in your employer’s health insurance plan. If this would be the case for you, going through the process described below will still be helpful.

The best tool I have found for projecting what your paycheck should look like is at the website paycheckcity.com. They have a calculator for both salaried workers and hourly workers. I will lead you through the steps for a salaried worker, but the steps will largely be same the same for an hourly worker.

Step 1: On the paycheckcity.com website, click on the “Salary Paycheck Calculator” link.

Step 2: Update the “Check Date” field to 1/1 of the current year. You are updating it to the first of the year because you want to estimate what your paycheck will look like over a full year of your new filing status.

Step 3: Update the “State for Withholding” field to your home state.

Step 4: The “General Information” section will look the same no matter what state you’re in. The steps to take here are:

  • Enter your “Gross Income” (before anything is taking out) and leave your “Gross Salary YTD” at 0, since you’re starting at 1/1.
  • Enter your “Pay Frequency”. This is how often you get a paycheck.
  • Set the “Federal Filing Status” to single, since you are trying to project your paycheck in the event that you become a single parent.
  • Use their W-4 tool to determine your “# of Federal Allowances”. Remember to fill it out as if you are a single parent.
  • The rest of the fields can likely be left as is. If you have additional withholding, possibly because you have a side business and want to pay the taxes for it through your paycheck, you can enter that value in the “Additional Federal Withholding” field.

Step 5: The “State and Local Information” section will look different for each state, so I can’t provide a lot of detail here. You state’s Department of Revenue website should have helpful information if you don’t know how to answer a specific question. For Massachusetts, my home state, I had to do two things:

  • Determine my “Total Allowances”, which was different than my Federal Allowances. I googled how to do this and found the state form.
  • Checked that I would be filing as “Head of Household”.

Step 6: The “Voluntary Deduction Section” allows you to enter any deductions that you know you will be taking. The one deduction that everyone should consider is the “Sec 125” deduction on their paycheck. This will include your portion of health insurance premiums, any qualified retirement plan contributions, and any other pre-tax employee benefits. If you are already on your employer’s health insurance, simply enter your current amount here. The easiest thing to do is simply calculate it as a “% of Gross Pay”. If you would newly be enrolling in your employer’s health plan, you will need to find out the cost or make an estimate and factor that into your deduction. Then check all of the “Ded. #1 Exempt from” boxes and click the “Add Deduction” button.

Step 7: Click the “Calculate” button at the bottom. This brings you to a page that outlines what your projected paycheck would look like. The “Net Pay” amount is what your new take-home pay would be per pay period. Look over the numbers to make sure everything looks accurate.

Step 8: Copy that “Net Pay” amount over to the “Budget” worksheet of your Google spreadsheet and enter it into the “Paycheck” row of the appropriate column. Remember to adjust the amount to make it reflect one month’s pay. So, for example, if you’re paid twice per month, you will want to multiply your “Net Pay” by 2.

Step 3: Project your spending changes in the case that either parent dies

Now that we’ve got the income change determined, we’re going to work on changes in spending. In this step, it’s best to err on the conservative side of things. In other words, it’s better to project more spending than less. In many cases, such as with cable, internet, electricity, etc., you can assume that your spending will probably stay the same. But other categories will certainly have the possibility of change. There may even be new categories added. I’m going to talk here specifically about certain categories that should get special consideration.

Retirement savings – If you’re already saving as much as you should be, then this amount can probably be reduced somewhat. For one person, you might only need 75% of the savings that you need for two. If you’re not currently saving enough, put the amount you should be saving here. In either case, a slightly more detailed analysis could be helpful here. You can refer to this post on retirement planning to get a ballpark idea of your savings need.

College savings – This may go to $0 if you plan on including a lump sum for college costs in your life insurance. We will talk more about the lump sum possibility below.

Rent/Mortgage – Similar to college savings, this may largely go away if you include a lump sum to pay off your mortgage. But remember that even if you pay off your mortgage, there will still be costs for insurance, taxes and maintenance.

Childcare – This is where the big chunk of the life insurance need shows up for a stay-at-home parent. Unless the other parent plans on quitting his or her job, which is unlikely for obvious reasons, this will be a big new expense. You can get a sense of the cost at naccrra.org. My recommendation would be to estimate on the higher end for your state for each child. Again, conservative estimates will help you avoid trouble when you are actually facing the need.

Health Insurance – This is a tricky one. There are a lot of variables and I wouldn’t spend a ton of time trying to get everything exactly right. What I would do is try to get a ballpark sense of what it might cost, again estimating on the high end.

If your health insurance is currently coming from one spouse’s employer, getting an idea of what it might cost if that spouse dies will take a little bit of work. If the other spouse works, you could certainly switch to that employer’s plan but you should find out what the cost will be. If the other spouse doesn’t work, you can stay on the deceased spouse’s insurance through COBRA for a while, but again you should ask about the cost.

Eventually you may need independent health insurance though, and you can get a sense of the potential cost from sites like ehealthinsurance.com and healthinsurance.com, or by going to healthcare.gov and finding your way to your state’s health insurance exchange.

If you are not married, but your children are currently covered by the other parent’s health insurance, you would likely be switching to the family plan with your current employer, which would increase your insurance costs. If you are not employed, you would need to investigate independent health insurance as described above.

Groceries/Eating Out/Auto Gas – For these kinds of categories, I wouldn’t automatically assume that that you will spend less with only one parent. If anything, especially at first, you might actually spend more as you adjust to your new circumstances and needs. It’s probably safe to just leave them as they currently are, unless there are specific circumstances that might dictate otherwise (such as one spouse who currently spends a disproportionate amount of money on gas).

Auto/Disability/Life Insurance – Any insurance for the deceased spouse will no longer be needed. That should decrease the cost here.

Step 4: Determine the amount of insurance you need to produce the required income determined by Steps 2 and 3

Based on your work in Steps 2 and 3, you will now have a calculated value on the “Net Flow” row of the “Budget” worksheet for each parent. If this is a negative number, which is likely, this is the monthly income you will need in addition to your other income sources if the given parent dies. This income is the base of your life insurance need.

If you switch over to the “Insurance Needed” worksheet, most of the work has already been done for you to determine the amount of life insurance needed to cover this income. The “Annual Income Needed” row will already have been populated by simply multiplying the “Net Flow” value from the “Budget” worksheet by 12 to calculate an annual income.

The main thing you need to do is fill in the “Years of Income” row for both parents. This is the number of years that income would be needed in the case the given parent dies. There are a number of factors to consider here. If it’s a working parent that dies and the surviving parent is not currently working, you have to gauge the ability and desire of the surviving parent to work and how long it might take for that income to take shape. If it’s a stay-at-home parent who dies, you have to consider the age of your children and how long they might need childcare. I would estimate conservatively here, understanding that it may take a while for the transition to a new lifestyle to fully occur. Anywhere from 5 to 25 years may be a reasonable number here, depending on your personal situation and desires.

Once you fill that row in, the “Income” row of the “Insurance Need” section will automatically be populated. This is the amount of insurance needed today to generate the income from above for the number of years you specified. This uses a number of assumptions, which are detailed in the “Variables” column of this worksheet. These assumptions include the inflation rate, the return you can get from different asset classes, and the asset allocation strategy you would use for your money. I’ve intentionally made the assumptions relatively conservative and I think they will work well for most people. You are welcome to change these variables, but make sure you have an understanding of why you’re changing them or your resulting insurance need could be significantly off.

Step 5: Outline your current debts

In the “Debts” worksheet of your Google spreadsheet, list any debts you currently have. This includes your mortgage, credit card debts, student loans, auto loans, and any other money you owe. Put the current balance for each category in the “Balance” column of that worksheet.

To make sure you get a full and accurate picture of your debts, start with the most recent statements issued by each lender. You will either have received something recently in the mail or you can check online. I would also recommend pulling your credit report through annualcreditreport.com. This site is run by the Federal government and is the only place where you can truly get your credit report for free. You are allowed to view your credit report once per year for each of the three major credit reporting bureaus.

Go to annualcreditreport.com and pull your report for each bureau. Print out/save each of those reports, and look through each of them. They will list all of the debts you have that have been reported to the credit bureaus. It may not be 100% complete, and it also may include debts that have been closed out, but it will help jog your memory for anything that you may not have included off the bat.

When looking at each item on your credit report, there are two main pieces of information that will be helpful for this specific process. The first is something that indicates whether the account is open or closed. This will either be indicated by a “Status” that says something like Open/Closed/Paid, or will have fields like “Paid” or “Closed” that may or may not have a date next to them. You want to pay attention to the open accounts only. The second piece of information is your Current Balance. This is the amount you currently owe on the given account. You want to include the current balance for all accounts that are still open.

For more information on how to read and understand your credit report, Transunion has a pretty good user guide that walks you through their credit report and how to understand each piece of information. Each bureau’s report will look different, but this will give you a good sense of what you’re looking at.

Step 6: Determine lump sum needs and wants

Once your debts have been filled in, you can switch back over to the “Insurance Needed” worksheet and look at the “Lump Sum Needed” section. You’ll see that the “Mortgage” and “Other Debts” rows have been filled in based on the information you entered in the “Debts” worksheet. These amounts will now be included in your total life insurance need.

Mortgage

If you listed a mortgage in the “Debts” worksheet, this will already be populated.

But if you are currently renting but know that you would like to buy a house in the near future, you could update the “Mortgage” row to reflect the estimated mortgage amount you would expect to take on. This would allow you to either pay off all or most of that mortgage, or put the money towards buying a house outright. Note that this definitely falls into the category of a want, not a need, and it would certainly add to the cost of insurance. But it’s something that could be extremely helpful.

The alternative would be to take out some more life insurance in a few years if you actually do purchase a home so that you could cover your mortgage then. The risk with that strategy would be that if your health changed for the negative over that time period, you may need to pay more for insurance or you could possibly have trouble getting insured for that extra amount.

End-of-Life Expenses

The “End-of-Life Expenses” row is meant to account for all end-of-life costs, such as medical care and funeral and burial costs. This need will vary widely depending on the specific medical circumstances and how your family chooses to handle the funeral arrangements. I have entered an estimate of $20,000 here, which is again meant to be a slightly conservative estimate. You are welcome to adjust this amount based on your own research, but I think this number should serve most people’s needs.

Keep in mind that adjusting it up or down $5,000-10,000 will do almost nothing to the actual cost of the insurance, but could make a huge difference in the money you have available to handle your needs at the time of death.

Education

The “Education” row allows you to enter a lump sum you would want to leave for your children to pursue their education, particularly college. The thinking is that if you are no longer around, it may be harder to pay for college and you don’t want that to handicap your children’s future. Accounting for the cost of college in your life insurance will give your children the best chance to be able to afford it no matter what.

To estimate your education need, you need to give some thought to what you would like to pay for. Remember that there are many ways to pay for school, including scholarships, loans and your children working while in school, so it’s not necessarily on you to pay for the whole thing. Each parent will have to make their own decision. Here are some things to consider:

  1. Would you like to pay for public or private school? Private schools will cost more in most cases. Think about the expected trade-off in cost vs. the expected trade-off in education and opportunity.
  2. Once you’ve decided on public vs. private, determine the full four-year cost of that education. This should include room and board and all other expected costs. Here is a good resource for looking up this information: collegeboard.org.
  3. Determine what portion of the number from Step 2 you would like to cover. This is a very personal decision and will vary from person to person from $0 to the whole thing.
  4. Multiply the cost from Step 3 by the number of children you are considering. Enter this number into the “Education” row of your worksheet.

Finally, you can add any other lump sums you want to include on the “Other” row of the “Lump Sum Needed” section. This will likely be $0 for most people, but each family has unique circumstances so feel free to add anything here that is relevant to your situation.

Step 7: Determine what will be covered by Social Security

It may be that a significant portion of your need will be covered by your Social Security death benefits. You can get an estimate of these benefits by pulling your Social Security statement through the SSA site. You will have to create an account if you don’t already have one, but then you will be lead to a page where you can click on the “View Estimated Benefits” link. This will show you all of the Social Security benefits you have earned to this point, which is helpful for a number of reasons. But for now we will focus on the death benefits.

Scroll down to the “Survivors” section to see what your death benefits would be. There are three numbers to consider here:

  1. The “Your child” amount is the monthly amount that would be paid out to each child who is unmarried and under the age of 18.
  2. The “Your spouse who is caring for your child” amount is the monthly amount that would be paid to your spouse as long as he or she remains unmarried and still has dependent children under the age of 16.
  3. The “Total family benefits” amount is the maximum monthly amount that would be paid out across all eligible recipients.

So to determine how much your family would receive, you can multiply #1 by the number of children you have, add #2 if you will have a surviving spouse who meets the requirements, and then cap your result by #3. You can then multiply this result by 12 to get the annual amount.

There are several reasons to err on the side of caution in terms of how much of this final amount to include in your calculations. The first is that the length of time you would receive the benefit depends on the age of your children. The second is that if your spouse is receiving some of the benefit, then the amount could be reduced if he or she is working. For us, with young children, we would expect to get the benefit for a while, but to be on the safe side we only included 50% of the annual amount figured above in our calculation.

Whatever you determine as your expected annual benefit from Social Security should go into the “SS Annual Estimate” row in the “Insurance Needed” worksheet.

To finish this step, you need to estimate your “Years of SS”. In other words, based on the limits explained above, for how many years could your family expect to receive the benefits?

Once both of these pieces of information are entered, the “SS Insurance Equivalent” row will populate. This is the amount of life insurance that your Social Security benefit represents. This amount will be subtracted from the other needs to determine your final insurance need.

Step 8: Add any other savings available to cover your needs

On the “Savings Available” row, you can include any savings you already have that are specifically allocated towards one of these insurance needs. A common item to include here would be any college savings you already have. Other than that, you likely won’t have anything to add. Some people have savings dedicated to paying off their mortgage, so that could be added as well.

Specific things that should not be added because they have other designated purposes include:

  1. Retirement funds
  2. Emergency funds
  3. Other sinking or “saving to spend” funds

Any amount put here will reduce the amount of life insurance you end up needing.

Step 9: Review your final amount and add 10%

At this point, every row of the “Insurance Needed” worksheet should have been considered and you will have a “TOTAL NEED” for each spouse. This is the amount of life insurance each spouse should get based on all of the assumptions and calculations we’ve just gone through.

As a final step, I would suggest adding another 10% to each amount. So if your Total Need comes out to $1,000,000, I would add another 10% to get to a final number of $1,100,000. The purpose here is again to be conservative. This should help cover any estate taxes you might owe, as well as any other unexpected needs such as unusually high final medical bills. Again, it’s always better to err on the safe side.

Summary

Phew! That was a lot. If you’ve made it this far, good for you. It was a lot of work but you now have a detailed understanding of your life insurance need. This is a huge step.

In a subsequent post, we’ll talk about how to go about actually purchasing life insurance. But for right now, take a deep breath and relax. You’ve earned it.

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29 Comments... Read them below or add one of your own
  • holly April 18, 2013

    Are you reading my mind today?!~? =)

  • Matt Becker April 18, 2013

    Haha, I wish! I’m just highly skilled at using your comments system to change the post it links to for my comment. Like a comment ninja.

  • Cliff Nuttman August 22, 2013

    I’m in the process of figuring it out as well. 33, no children yet but probably one or two in the future. I laid out a 30 year spreadsheet with the amount needed for various things: 1 – pay of debts. 2 – standard of living/income replacement for surviving spouse/child. 3 – extra costs needed per child. We’d need about $350k right away to pay off all mortgages, car loans and debts. Though that would be more than 100%, and the surviving spouse would still have income, we decided that if one of us dies we’d like the other to at least get to live in the house without having to worry about paying it off. They can use their income from working to keep paying taxes and maintenance. So we started at 350k and basically reduced it by 1/30th each year – even though really we should have tried to estimate what we’ll really owe on those loans each year, but for simplicity’s sake did it that way.

    Then we figured that the surviving spouse should get about $36k after tax for living expenses (which is high with no kids but probably a good standard of living if you have one or two and no house payment). Starting in year 30, I put 36,000 in that column, and then for each column above that I divided by 1.05 and added 36,000. If you return 5% a year, you don’t need 36,000 x 30 years, you only need $8,329 in year 1 to grow to $36k by year 30. And you better believe if one of us dies and gets a huge lump sum payment, we’re investing it in equities that should return over time somewhere around 5% while also providing a hedge against inflation.

    So if you take those two calculations and you sum them for each year, you can find your need for each year. How much do you need in year 21 (it should be substantially less than year 1, as your mortgage will be almost paid off by then and you only need to fund 10 years of living expenses instead of 30). Buy a 30 year policy for the year 21 need. Then look at how much you need in year 11, subtract the 30 year policy amount and buy a 20 year policy for that amount. Now look at how much you need in year 1 – subtract the 20/30 year amounts and buy the rest as a 10. Just looking at the total amount as a single 30 year policy, I find that over the life of the policy, you’ll pay about 35-40% less doing it this way. If you aren’t comfortable doing it this way, buy two 30 year policies – one for the amount you need in year 21 and one for the rest. You’ll only pay about $25/year extra doing it this way, and when you get to a point in your life where you’re needs are less, you can always cancel one, if not, you’re only out about $750 over 30 years.

    If you’ve already got children, I would advise incorporating them into your planning. Let the SS death benefit for the children pay for their day to day expenses – clothes, cribs, etc. Then figure out how much you’d want to provide for college and private school. We plan on using public school, but you never know. I’d like to be able to provide $25k/year for college, and plan on around $10k/year for private 7-12 just in case. Again, start with 25k in year 21 of their life, start dividing by 1.05 and adding $25k for the four years of college each year (you’ll see that you’d need $93,081 at the beginning of freshman year to have $100k for the four years) and then do the same thing for the six years of high school. By the start of 7th grade, you’d need $122,753 to cover this per child. But in year 1, you’d only need $71,771 because that would grow over time to pay those bills. Another thing to factor in – at 5% annual growth, if you started putting away about $5331/year per child and committed to saving/investing that amount each year, you should have enough to pay for 6 years of $10k private school tuition and 4 years of $25k college costs. If you plan on sticking to this plan, you can calculate your need and your shortfall based on where you’d be with your own savings plan. So at birth, again you need $71,771, but in year two you only need $75,360 and you should have saved $5331 by that point, so you’re only “short” $70,028 at that point. What you find is that if you plan on saving for your child, even though you would need around $120k at the start of seventh grade to pay for all that tuition, by that point you should have $76k of it in the bank – you only need $53k at that point to cover your shortfall. Bottom line is, if you plan on being responsible and saving for your child’s future while you are alive and capable of working, you’ll never need more money than in year 1. So just buy a $75k 20 year term policy every time you have a child and that should cover you.

    Great insights – just thought I’d share my thought process.

    • Matt @ momanddadmoney August 25, 2013

      Cliff, first of all thank you for the incredibly thorough response. This is exactly the kind of reader feedback I’m hoping to get. When people contribute like this, well all learn a lot.

      I like your method for calculating debt and income needs. You’re absolutely right that your need is greatest in Year 1 and should decrease as time goes on. But I’m not sure I’m with you on your idea of purchasing three different policies. I checked out term4sale.com and ran a quick comparison of a 30 year policy for the full Year 1 amount vs. three different policies as you suggested. It was about 27% more expensive to get the three different policies than the single policy. On top of that, both of the companies I’ve worked with have allowed you to decrease the face value of your policy as you go, meaning you can achieve a similar goal of not spending more than you have to without having to purchase the multiple policies.

      On your education calculations, I could be misunderstanding or it may be purposeful but it appears that you’re not including inflation in your calculations. Is your goal to pay for $25k per year of college, whatever that buys 18 years in the future, or to pay for the equivalent of what $25k gets you today? If it’s the latter, then you’ll need more than $25k when that time actually comes and that needs to be part of your calculations.

      Thanks again for the input. I’d love to hear what you think about some of my thoughts.

      • Matt @ momanddadmoney August 25, 2013

        If you assume 4% inflation for education costs (who knows what it will really be), I believe your Year 1 need for education becomes $141,976 per child.

  • DC @ Young Adult Money January 13, 2014

    Matt, this is a beast of a post! I plan on getting life insurance this year and it’s something I shouldn’t have put off this long. I definitely do not want either my wife or to be in a tough situation financially if the unthinkable should happen.

  • John S @ Frugal Rules January 13, 2014

    Man, talk about a whale post. 🙂 Seriously though, good post Matt and solid breakdown of the issue of life insurance and how much you need. Sadly, far too many have nowhere near what they need, or get sold to by reps convincing them of what they need.

    • Matt @ momanddadmoney January 13, 2014

      We made the mistake of just going with what the rep said our first time around. Of course he suggested the max amount we could qualify for! I definitely agree with you that many people are underinsured so more is not necessarily a bad thing, but you want it to be based on real needs/wants and not what generates the best commission for the salesman.

  • Done by Forty January 13, 2014

    Oh, crap. You just ate up my Monday night, jerk. Now, instead of watching season three of Friday Night Lights, I’ll be filling out a flipping spreadsheet to confirm what kind of life insurance amount I need. Sure my family will be better off, but did you ever stop and think of my free time? Sheesh.

    • Andrew January 13, 2014

      Yea, thanks a lot Matt! Unbelievable! Haha…too funny! I got some life insurance quotes from terms4sale while my wife was pregnant but never went through with buying additional coverage on top of my work coverage. I did however get supplemental life insurance via my union…but it was a small amount. I really should consider getting more, and also getting one outside of work. Thanks for the reminder…but shame on you for ruining everyone’s Monday evening!

      • Matt @ momanddadmoney January 13, 2014

        Haha. As I said to DB40, if you end up using it please let me know if you have any input. There’s always room for improvement.

    • Matt @ momanddadmoney January 13, 2014

      Haha, just be glad you didn’t have to CREATE the spreadsheet! If you actually do end up using it, I’d love to hear your thoughts. Collective input can only make this better for everyone.

  • Shannon January 13, 2014

    This is a great reminder Matt! I have also advised clients to use the Life Calculator app. It is free and helps you run through your life insurance needs pretty quickly.

    • Matt @ momanddadmoney January 13, 2014

      Interesting. I hadn’t heard of that tool. I’ll have to check it out. In general though, the issue I had with any of the quick tools I found is that they weren’t personal enough to make me feel comfortable that I was making the right decision. Maybe this one is different though. Thanks for sharing!

  • MyMoneyDesign January 13, 2014

    Holy cow that is a monster post!!! Good idea recycling an older post. I actually do this often (but the trick is not to reveal it).

    The second time I bought life insurance I just went as high as possible exceeding our income by 12x. When I compared costs, I figured why not. There is a lot of hassle to go up in coverage, but never any to go down. So I just figured why not since I plan to keep my income on the up and up!

    • Matt @ momanddadmoney January 13, 2014

      Haha, I’m okay letting people know, especially with something like this where really almost no one has seen it before and I think it’s providing some real value.

      I do like your point about it being easy to go down but not always easy to go up in coverage. That’s definitely a reason why I tried to shoot a little high in my calculations here. I’d rather have a little more coverage than I think I need than find out I don’t have enough, PLUS the fact that you can always adjust downwards. Definitely important to keep in mind.

  • Shannon Ryan January 13, 2014

    Great post, Matt. Love the level of detail here. Life insurance is an important piece of our financial foundation and one that gets overlooked too often. To me, it’s a no brainer. It’s peace of mind. I don’t plan on dying young (because who does?) but if I do, my family will be okay. And that’s worth facing any fears about mortality and doing the work needed to figure out what my family needs to thrive (not just survive) if my husband or I die.

    • Matt @ momanddadmoney January 13, 2014

      Totally agree. It’s not a fun topic to deal with but it’s one I can’t really imagine leaving my family without. Plus you can get it done and then kind of ignore it for a little while. Things might change and you’ll need to revisit, but at least you don’t have to stay on top of it like a budget.

  • Kim@Eyesonthedollar January 13, 2014

    I’ve always had probably more life insurance than my family needed, but it’s not something you can’t do over if it becomes necessary, so that makes me feel better to have a pretty high amount of coverage. Now that I’m not working as much and Jim is making more, it is probably time to think about increasing his coverage.

    • Matt @ momanddadmoney January 14, 2014

      We have pretty high amounts of coverage as well, even on my wife who stays at home. The cost of childcare and everything else she does is high!

  • Laurie @thefrugalfarmer January 14, 2014

    Whew! I need to take a nap after this one, Matt! 🙂 Seriously, though, very good info here. We are lucky in that we purchased lots of life insurance cheap after our oldest was born, so we are hooked up good.

  • AvgJoeMoney January 15, 2014

    You’re right! I hadn’t read this last year.

    I like this “capital needs analysis”, and I think it’s half of the goal post. So many of these numbers blow in the wind that estimating what the real number should be….even after all of the science….is still pretty precarious. So I also like looking at human life value. How much money are you going to bring to the table between now and the time you die? That number minus any return you’d get on the money will tell you how much you need to just straight replace your income.

    Of course, this is going to give you a flippin’ huge number….but the capital needs analysis (for an aggressive person with the numbers) could be woefully below the real need.

    Great stuff. I love it when someone digs into life insurance rather than just offering up another tired “rule of thumb.”

    • Matt @ momanddadmoney January 16, 2014

      Looking at both can certainly be a worthwhile activity. The problem I have with the human life value approach is that there’s just no context to actual need. I could be making $1 million per year but if I don’t have any dependents then I still likely don’t have any need. But then let’s say I’m going to have a child. Does that mean that I suddenly need to replace that full $1 million per year? Maybe, but probably not.

      I like the capital needs analysis because it’s consistent with other areas of financial analysis where you evaluate the individual’s actual goals, needs and circumstances. Though I do agree with you that the measurement is very imprecise, which is why I encourage people to aim high with all of their estimates. I think most people who actually followed the directions here would end up with a number that was higher than they might have expected when starting out, which I think is largely a good thing as long as it’s within reason.

      But as always, there are many routes to Rome. As long as you’re getting the protection your family needs the way you get there really doesn’t matter.

      • AvgJoeMoney January 16, 2014

        I don’t want to belabor this financial-nerd micro point, but I think you’re making a value assumption for your client when you discount human life value because “there’s no context to actual need.” For some, life insurance means other things….like replacing the income stream that the person brought in.

        Frankly, I was surprised by this, because in my book, a minimal amount of life insurance is right for me. I don’t want my family to CHA-CHING! when I die….for us, that’s not the point.

        But for others, replacing that stream is important (I think that’s why wrongful death lawsuits nearly always boil down to a human life value discussion…..). So my job was to give them the “goal posts.” On one end was this number I thought was ridiculously high and on the other end was this number riddled with assumptions. Then we’d talk about what life insurance means to you and make a decision where we wanted to “kick the ball” between those points.

        • Matt @ momanddadmoney January 16, 2014

          I actually 100% agree with you and should probably define what I mean by the word “need”. I don’t mean just the barebones essentials for survival. Rather it’s whatever you need to accomplish the goals you want to accomplish. For some people that could very well mean replacing their income for many years to come. That’s why I encourage people to consider not just the ability of the surviving spouse to work, but also the desire and to pick a length of time they want their income to last that corresponds to both. Maybe they never want the spouse to ever have to work again, in which case they can plug in however many years that is and get the number that way. It’s just that I think that’s a decision that should be made as part of the needs analysis, rather than assumed.

          In any case, I think your approach of providing two numbers is a perfectly valid way to help spur this kind of discussion, so I don’t think there’s much disagreement here. And I’ll definitely keep this in mind when I actually have to help convince a couple to go with a little more life insurance. Maybe framing it that way is really the best way to get them to get the amount they need.

  • Rachel December 10, 2015

    Are you excluding retirement funds from savings since the surviving spouse may need that to retire?

    • Matt Becker December 11, 2015

      Exactly. Retirement funds are earmarked for a future purpose, while the primary purpose of life insurance is to fund the current financial needs of your surviving family members (which includes ongoing contributions to retirement accounts).

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