How Much Life Insurance Do I Need?

How much life insurance do I need?

Life insurance is an essential part of being a responsible family member. Do you have a plan for income replacement or expense settlement?  While it is true that some debt dies with an individual, there are two critical considerations.  First, if you are married, all your debt does not die with you.  Most of your debt is an ongoing obligation of your spouse. If you have any property or valuables, those may be sold to settle your debts. 

If you are married, your debts are then the responsibility of your spouse. Secondly, if you are a Christian, the Bible does admonish those who would ignore their responsibilities to their family. When the Apostle Paul was writing to his disciple Timothy, he is specific in his instructions as to how family members should care for each other. “But those who won’t care for their relatives, especially those in their own household, have denied the true faith. Such people are worse than unbelievers” (1 Timothy 5:8, NLT).

How your family can settle your debt

One of the best ways to care for your family members beyond your life is to arrange to pay off your debts should you die prematurely. Accordingly, planning to settle debt can be done in two ways.  One is by indicating how your debts should be resolved in a written will.  Anyone that owes anything or owns property needs to have a will.  The age of a person does not matter.  If you are a twenty-four-year-old with car payments, a student loan, and any other debt, you need a will.

You need a will

A will does not need to be complicated.  You can seek the personal advice of a lawyer or use an online legal document service. Providers such as and have wills and even legal advice online.  If you decide to make a will on your own, an essential thing that you cannot do online is to have a witness to your signature.  That requirement varies between different states. Most of the online will services will give you information on various state’s requirements for a witness to validate your signature.    

Gauging your need

If you do not have enough savings or value in your property to pay off your debts, you need life insurance.  Determining how much life insurance you need can be done in several ways.  One of the most common and easiest methods is to multiply your income times ten, and that is how much life insurance you need. Another technique is the income replacement method, and yet another is the needs analysis method.  Any of the three methods are valid.  The decision on which way to use all depends on how comfortable you are with the answer.

Examples of how much life insurance is needed

Age Groups Average Income Life Insurance Needed Average Debt
20-24 $27,456 $274,560 $42,000
25-34 $39,416 $394,160 $82,500
35-44 $49,400 $494,000 $152,400
45-54 $50,024 $500,024 $150,500
55-64 $49,608 $496,608 $131,900
65-74 $47,432 Varies $108,700
75 + $30,635 Varies $57,500

The ten-times salary method is not a random number.  After years of people buying life insurance, trends indicate that if a person has ten times their income in life insurance, that amount would be enough to pay the average person’s obligations.  A little more scrutiny of the numbers does show that it is an approximation, and every person should adjust the ten-times income rule to their situation.

25 to 34-year-old’s debt

At younger ages, individuals do not have much debt. However, debt can begin to add up quickly once a person starts to support themselves.  The best advice would be to have no debt.  However, for some expenses like college, there is no other way to afford to go, other than taking out a student loan.  Most college students are exiting college with about $42,000 in college loans.  An average new car is running about $32,000.  For a 25-34-year-old person that is earning, on average, $39,416, that is a significant expense. If you are in that age range, maybe reading this will be the encouragement you need to rethink buying a new car.  Nonetheless, if you add the cost of a vehicle to the student loan and add credit card debt, the total personal debt adds up quickly. 

45 to 50-year-old’s debt

Debt is usually highest when people get to middle age.    Middle age is about the time that most people’s children are in college.  If you are in this situation and you are paying for college out of pocket, you probably have a mortgage, a couple of cars, cars for your college-age children, and all the out-of-pocket expenses such as car insurance.  If you are the average middle-aged person that is making about $50,000 per year, you can see how having $500,000 in life insurance would be about the right amount to take care of all your financial obligations. 

Income Replacement method 

Another common method of determining the right amount of life insurance is the income replacement method.  The idea behind this method is to replace your income if you die.  Take your income and subtract 25%.  This method assumes that your financial consumption is about 25% of your income.  To replace the remainder of your income, assume that your family will need a lump sum enough to pay the remainder of your income for an indefinite period.  Assume that you have a lump sum of money-earning a hypothetical 4%.   Here is an example of how the income replacement method works.    (income-25%)/.04= life insurance amount.  Here are the numbers using a $50,000 income example.  $50,000 x 25% = $12,500.  $50,000-$12,500 = $37,500. $37,500/.04 = $937,500. 

Quick vs. Precise

The income replacement method does result in a higher life insurance amount.  However, this method is more useful for individuals that have higher debt and more obligations, such as the expense of caring for children. The income replacement method is a quick method of determining the amount of life insurance you need.  However, the most precise way of calculating life insurance need is a needs analysis.  Needs analysis can be as detailed or as simple as you determine.

The needs analysis method

Needs analysis considers everything.  The way to begin this method is detailing every debt and obligation.  Here is an example of the items that are taken into consideration.

Needs to consider

  1. final expenses
  2. outstanding debts
  3. mortgage expense
  4. college funding based on your child’s current age and your choice or expectation of a private or public school
  5. your current income
  6. number of years that you want your income to continue
  7. amount of money you have in savings
  8. value of current retirement savings
  9. amount of life insurance you currently have on your life
  10. your spouse’s income
  11. number of years your spouse expects to work
  12. estimated taxes on your spouse
  13. the estimated rate of inflation
  14. the after-tax yield that you anticipate on investments and retirement savings

Everybody’s situation is different

The result of a needs analysis takes into consideration the financial impact of your dependent’s requirements, the loss of your income, any immediate expenses, and the future financial security of your family. When there is a need for more detail in determining the need for life insurance, you may benefit from the assistance of a financial advisor who is an expert that will help you cover all the relevant factors for life insurance.

The method that you choose to calculate your need for life insurance is not an indicator of your care for your family.  Everybody’s financial situation is different.  No matter how you choose to take care of your financial obligations, you can live with the comforting thought that caring for your family is appreciated by those you love and good in the sight of the Lord. “Good people leave an inheritance to their grandchildren, but the sinner’s wealth passes to the godly.” (Proverbs 13:22, NLT).

If you would like direction on calculating the amount of life insurance you need to protect your family, you can find a Life Insurance Needs Worksheet here.