Insurance

How Much Life Insurance Do You Actually Need?

5 min read

Life insurance isn't for you — it's for the people who depend on your income. The question isn't whether you need it, but how much. The answer is a number, not a guess, and it comes from a straightforward calculation.

The Income Replacement Framework

The core idea: if you died tomorrow, your dependents would need a lump sum that, when invested conservatively, replaces your after-tax income for the years they'd still depend on you.

Start with your annual after-tax income — the money your household actually lives on. Multiply by the number of years your dependents will need support. A common target is until your youngest child finishes college.

Example: You earn $80,000 after taxes and have a newborn. Covering 22 years gives you a baseline of $1.76 million. That's the simple version. Now adjust for the details.

The Debt Adjustment Layer

Add every debt your family would need to pay off or manage without your income:

Mortgage balance: Your family likely wants to stay in the home. Add the outstanding principal.
Car loans, student loans, credit card debt: Any co-signed or shared debt gets added.
Medical and funeral expenses: $15,000–$25,000 covers final expenses and uninsured medical costs.

If your mortgage balance is $250,000, your target rises to roughly $2.01 million before other adjustments.

College Costs

If you're planning to fund college, include a lump sum per child. A public in-state university runs roughly $100,000–$120,000 today in total cost. Two kids at a state school adds $200,000–$240,000.

Do you fully fund this or let your spouse and kids figure it out with financial aid and loans? That's a personal call, but include it in the framework so you're making a conscious choice, not an accidental one.

Subtract Existing Assets

You don't need to insure dollars you already have. Subtract:

Current retirement account balances (401(k), IRA)
Non-retirement investments and savings
Existing life insurance (through work or individual policies)
Social Security survivor benefits — your minor children and their caregiver may qualify. The SSA's website estimates this for your specific earnings record.

If you have $150,000 in retirement savings and a $50,000 employer group life policy, that's $200,000 you can subtract.

Putting It All Together

Income replacement ($1.76M) + Debt ($250k mortgage + $20k final expenses = $270k) + College ($200k for two kids) – Existing assets ($200k) = $2.03 million

That's a realistic number for a parent earning $80,000 with a mortgage, two young kids, and modest savings. It may sound high, but that's the math.

Why Term Life Is Usually the Answer

Term life insurance covers you for a specific period — typically 20 or 30 years — at a fixed premium. A healthy 35-year-old can lock in a $2 million, 20-year term policy for roughly $75–$95 per month.

Whole life and universal life policies combine insurance with an investment component. The premiums are 10–15x higher, the investment returns are underwhelming, and the complexity works in the insurer's favor. For nearly everyone, buy term and invest the difference.

The Final Check

Your policy should last until your youngest child is financially independent, your mortgage is paid off, or your retirement savings could cover your family — whichever comes last. A 20-year term bought at 35 expires at 55. If your youngest is 16 and your mortgage has 20 years left, that lines up. If not, layer a 30-year term or buy a second, smaller policy later.