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Originally posted 8/11/2007, updated 11/23/2019

Part of the whole life insurance equation that people get hung up on is how much life insurance is enough. There are life insurance calculators like the one below that can help, but the best process is a good old fashioned talk about what would be lost if a spouse died unexpectedly. Is it income that would be lost?

Often a retirement option is chosen that provides a maximum benefit while the retiree is living and then a partial, or sometimes no, benefit when they die. I remember that my father took a lower monthly retirement than he could have, but that amount went on, in full to my Mom, when he died. I know from my own experience with my parents that if he had chosen a higher income with less or no income going to Mom, it would have been a great hardship on her. Choosing the higher retirement income option can be protected for the spouse with life insurance.

Back in the days of high interest income, it was simple. The standard answer to how much was 10 times your annual income. The logic was that your spouse could put the death benefit into an interest bearing investment that would produce 10% or more and they could then withdraw an amount equal to the lost income every year and leave the principal amount intact for other purposes. Pretty simple and it actually made sense at one point. Needless to say, long gone are the days of 10%+ guaranteed after tax returns on investments. There are several different calculators and methods out there. Here is a common method using income replacement alone.

Insurance Calculator

Annual replacement income needed if the insured dies
prematurely (before tax):

Number of years a replacement income is needed by dependents/beneficiaries:

Estimate the average annual interest rate that you can earn on the invested life insurance proceeds:

Estimate the average annual inflation rate:

The amount of life insurance needed to replace the annual income is:

Using this type of calculator can at least give you a basic idea of pure income replacement. What it doesn’t do, that an independent agent can help you do is determine how other assets can offset part of the long term need for insurance. When you factor in other assets it can drive down the cost of insurance. It also begins to make clearer the need and logic of staggering your life insurance coverage.

Bottom line. Determining the amount of insurance is not an exact science, but there are plenty of tools out there that can help. Just make sure you look in all of the corners for offsetting assets before you give your final answer.