How Much Life Insurance Is Enough?

By Steven H. Kobrin, LUTCF
April 11, 2003
Copyright © Steven H. Kobrin, LUTCF.
All rights reserved.

Do you know how to figure out how much life insurance is enough?

Financial companies and advisors use a variety of standardized formulas. Very often the need is determined by multiplying one's income by a set amount of years, such as ten or twenty. On top of this debts and other expenses are added; then, other assets are factored in. This is a very useful mode of financial needs analysis.

Unfortunately, this is too often a case of putting the cart before the horse.

Put the horse before the cart

Do you know what the essential thought must be when deciding to buy life insurance? It is this: what do I mean to those who are my beneficiaries.

One has to take that courageous mental leap and envision the lives of your spouse, your children, your business partners and other dependents without you.

It's a Wonderful Life

Psychology plays a key role in determining how much life insurance is enough. This psychology is found in the Jimmy Stewart movie, "It's a Wonderful Life," which very clearly shows the thought process that must take place.

In that movie the main character—Jimmy Stewart—becomes so despondent about life, he actually considers ending his. He fortunately has the benefit of an angel that intervenes and helps him see the impact of his loss on the people for whom he cared. What a revelation! He sees how essential he is to the well-being of those he loves, and he finds the strength to bounce back.

As crazy as it seems, this is the kind of vision someone must have when buying life insurance. You have to imagine life in your family or business without you.

What money is lost? Certainly your income. What about money you were contributing into savings plans? Who will fund college? What about the donations you had been making to your synagogue or church? How about the checks to the American Heart Association?

If you are in business, what will clients and vendors say? Will people get nervous and take their business elsewhere? Will creditors tighten up because they knew you and not your partner? What about your portion of the bank loan? Or how about your obligation to pay off a buy-sell agreement?

Your Family

In your lifetime you have set up a whole network of people that need you in various ways—chief among them, your family. So let's focus on your spouse and children for a minute.

Suppose you don't provide them with enough life insurance. What happens? Maybe college is out of the question. Maybe your spouse has to remarry quickly out of financial need. Maybe your spouse would have to work two jobs to make up for the lost income. That would be a nightmare: your kids would have lost you to a life tragedy, and then lose your spouse to eighteen-hour workdays.

Your Business

How about your business? Here you have spent so much time and money building a worthwhile enterprise. It has you written all over it.

What a shame it would be if your partners—or maybe your accountant, if you are a sole practitioner—had to sell the business at a discount because losing you meant losing money.

Life insurance to the rescue!

The good news here is that these tragedies can be prevented. It takes a commitment to care for people and to take pride in yourself as a provider and breadwinner. You have the power to keep your family and business thriving, even without you. Life insurance cannot replace you, but it can replace the money you had been making—and which others depend on.

How much life insurance?

Once you realize how important you are to others, you really become motivated to take care of them in the best way possible. Now you are ready to crunch numbers and calculate a face amount: it's the benefit required for you to be remembered as the hero that you really are.

Please use our life insurance calculator as a helpful educational tool.