Determining Your Life Insurance Coverage Needs

No one likes to think about death, but as the saying goes there are two things certain in life and, well, you know the rest. While most people agree that life insurance is necessary, according to 41% do not carry life insurance. Having a clear picture of the “why” of life insurance and a better understanding of “how” to determine what you need, can help get you started in choosing a plan or supplementing the life insurance you might already have.

Why Do I Need Life Insurance?

Purchasing life insurance is providing for the future financial, and one could argue, emotional needs of your loved ones in your absence. Unless you’re independently wealthy, or retired and financially stable, life insurance is needed for anyone who depends on you for their financial well-being. If your spouse or dependent children rely on your paycheck for their survival and lifestyle, your ethical obligation is to continue to provide for them when you are not physically here to do so. Unfortunately, like car insurance, many do not realize its importance until it’s too late, and that is why the earlier a person understands the “why,” and starts on the “how,” the greater the stability they can offer their family.

While it may seem daunting to determine what your family’s financial needs will be in your absence, a simple financial evaluation can help you decide how much life insurance you need to acquire. Here is the four-step process:

1. Determine Short Term Needs

Short term needs are financial obligations and/or expenses arising within six months of death. Examples of short term needs include expenses you pay now such as:

  • Loan balances (automobile loans, student loans, etc.)
  • Outstanding credit balances (credit cards, revolving lines of credit, etc.)
  • Mortgages (first mortgage, second mortgage, equity loans)
  • Everyday living expenses

Then add to these current balances any death-related expenses which must be paid in the short term:

  • Funeral expenses
  • Final medical costs
  • Estate settlement costs
  • Estate taxes due
  • Charitable bequests you would like to make at death

And if you don’t already have one, your survivors should be left with a liquid 3-6 month emergency fund sufficient to get them through any unexpected financial needs. You can use our calculator to help you determine how much to save for an emergency fund.

2. Determine Long Term Needs

In addition to covering your survivors’ short term needs, some level of monthly income will be needed to maintain their standard of living and meet financial goals you have made together. These long-term income needs include a future income stream to cover standard of living items (we recommend that you identify several time periods with unique needs such as while kids are in home, when kids are gone, and your spouse’s retirement years).

  • College expenses that you would like to cover for your dependents
  • Elderly care expenses you plan on contributing for relatives
  • Monetary support for a disabled dependent
  • Mortgages (first mortgage, second mortgage, equity loans (less the 6 months of payments)
  • Child care costs if your spouse will work after your death
  • All other living expenses (less the 6 months previously accounted for)

The total value of these future obligations is discounted back to present value amounts. This will give you a single dollar amount which, if invested, could provide funds for the long-term needs/goals of your loved ones.

3. Calculate Your Total Available Resources

At this point, you will have a pretty good idea of what your total cash need would be in the event of your untimely death. Hopefully, you have already begun to set money aside to cover some of these costs, and the government has a plan to help you as well (albeit that plan should be considered supplemental). Now you need to calculate the potential cash flow that will be brought in to your household.


  • The earned income of your survivor(s)
  • Survivor Social Security benefit (continues while you have children under the age of 17)
  • Retirement Social Security benefit (begins approximately when your spouse turns 65)
  • Survivor benefits from your pension plan

The value of these future resources also needs to be discounted back to present value amounts to provide the single dollar figure which will be used to offset your total monetary needs.

4. Providing Funds to Cover a Shortfall

It may be discouraging if you find you have a shortfall when comparing your total needs to your total resources. A shortfall situation means that your survivors will be left with the choice of either finding additional resources that you have not been able to identify, or do without many of the financial needs that you hope to cover.

Life insurance is uniquely suited for covering such a shortfall. It is a means of sharing the financial risk of premature death with many others who have similar concerns.

You pay a relatively small premium to an insurance company in exchange for their promise to pay your beneficiaries a specified death benefit in the event of your death. Basically, a financial need that arises from your death can be eliminated by a financial resource that is created upon your death.

Factors to Consider When Selecting Life Insurance

In an ideal world, we would each carry sufficient life insurance to continue to provide a lifestyle for our survivors similar to what they enjoy now, with us here. We cannot always afford to fully cover for our survivors’ needs and wants, particularly in our early years.

However, life insurance comes in many shapes and sizes. By carefully considering the type and amount of life insurance needed and contributing to, and considering all other revenue streams that best meets these needs, you can ensure that you have provided financially for your family, even if you are not here to do the providing. Use our life insurance calculator to get your started on determining  just how much life insurance is needed to provide for your loved ones.