Life Insurance Needs Analysis – Right Ways and Wrong Ways

There is a right way and a wrong way to calculate how much life insurance you need. First, let’s look at the wrong way.

The typical life insurance agent will steer you toward cash value life insurance of some sort. It might be called:

Universal Life
Whole Life
Variable Life
…or some other fancy name.

We recommend that you ask any agent, right up front…if the product he’s trying to sell you is term or cash value. Reject the cash value insurance.

Cash value agent will customarily ask you how much money you can afford in your budget for life insurance. Once you tell them how much you can afford, they will calculate how much cash value insurance he can sell you for that amount of money.

That is completely backwards, and has nothing to do with your needs.

Here is the right way.

Q: How do I determine the amount of life insurance I need?

A: It depends on what you are trying to protect.

Family protection: the most common reason for life insurance

Discussing your life insurance needs is a vital and necessary conversation. But remember, it can be fraught with emotion. You are making plans how to live after the death of someone you love dearly. So, be sensitive to each other as you progress. Show your love through your good planning.

Life insurance is actually income protection insurance. If you are alive and earning an income, life goes on. If you die, your income stops. But if you are part of a family, the surviving members of the family may still need your income for a certain period of time.

In a family situation, the main income earner should be the person with the most insurance. The second income earner should also be insured against loss of income.

Think about this: A person who worked a normal 40-year working lifetime and averaged $50,000 per year will earn $2 million in his lifetime. Sounds like a lot of money, and it is. But you won’t feel like a millionaire on the yearly plan.

Let’s show an example of the typical family of four. Dad is the main income earner, Mom also works outside the home but earns less than Dad. They have two children, ages 4 and 6. Dad and Mom are both 30 years old. Dad earns $50,000 per year, and Mom earns $30,000.

If Dad died today, Mom and the kids would still need his income until the youngest child is grown up. We traditionally figure that kids are out of the house at 22, or after their senior year of college.

So, 22 minus 4 is 18 years. Mom and the kids need Dad’s income for at least 18 years. If Mom died prematurely, Dad and the kids would need her income for at least 18 years.

Other expenses to consider are:

o Final Expenses (funeral, casket, cemetery plot, headstone)
o Mortgage payoff
o Debt payoff (credit cards, consumer debt)
o College funds: if you want to provide money for college, add the amount you choose.

In light of these variables, let’s show an example:

Dad: $50,000 x 18 = $900,000
Mom: $30,000 x 18 = $540,000
Mortgage payoff = $150,000
Consumer debt payoff = $20,000
College funds for 2 children = $100,000

The minimum amounts in this example would be $900,000 on Dad, and $540,000 on Mom. The other money goals could be serviced based on the family budget for term insurance premiums.

This calculation maintains the family’s lifestyle just as it was when both of the parents were alive. Another thing you must discuss is whether you wish to maintain the current lifestyle, or if you wish to lower the lifestyle.

If Mom died prematurely, Dad might only need her income replaced. He might decide to continue with the mortgage and debt and pay for college when the children arrive at that age.

One of the other things you must discuss is the likelihood that the surviving spouse will remarry. This may change your priorities and alter your calculations. But the best thing to do is to adequately insure your income so that the surviving spouse doesn’t feel compelled to marry again simply because of lack of money.

If your employer provides group term life insurance, we recommend that you buy as much as the group insurance program will allow you to buy. Group term insurance is customarily the cheapest term available. Just remember that if you leave that employer, your insurance might not go with you.

Term life insurance policies come in basically two types. First is the Annual Renewable Term policy. It is a one-year policy that is renewable on each policy anniversary. However, the next year’s premium will be a little higher each year you renew it. Cancel at any time.

The second type of policy is a Level Term policy. Insurers add up the premiums for the amount of years in the term and divide by the number of years. That way, your premium stays the same throughout the term of the policy.

This family’s example we shows 18 years of income need. Insurance companies usually don’t have an 18-year level term product. Usually, they will offer ten, fifteen or twenty year terms policies. In this example, we would recommend buying either a 15-year or 20-year level term insurance policy. Decide which one to buy based on your own analysis of your family’s needs. Your final analysis will determine the length of time you will need this insurance.

Other Protection Needs

Calculating the needs for non-family issues can be much less emotional and much simpler. Some examples are:

o Mortgage payoff
o Buy and Sell Agreements for business entities
o Keyman Insurance
o Estate tax planning

Customarily, these calculations involve the amount of debt to protect, or in the case of Keyman Insurance, the protection of a business’ income with the death of a key employee or owner.


Life insurance is the only type of insurance that insurers and agents have tied together with aspects of investment or cash value. I have never met another person who would even consider bundling so much as a savings account with their car insurance, or home insurance, or business insurance. Savings and investments should NEVER be done with an insurance company. Insurance companies are middle-men. They will take your money and invest it for you. They will pay you a small interest amount and the insurer will keep the difference.

Buy term insurance…ALWAYS.