Life Insurance Needs Analysis: How Much Coverage Do I Need?
Life InsuranceWhen purchasing life insurance, it’s important to determine the amount of life insurance that fits your personal needs – and the needs of your family.
Many individuals tend to think backwards when it comes to life insurance. They make critical decisions on the product they want, whether it’s permanent life insurance, basic term life insurance or even a combination of both, before thinking through the amount of protection they need.
As such, you really need to first assess how much life insurance you need before you even think about the product that would be most appropriate. If you’re unsure how to calculate your life insurance needs, a needs analysis can help you get started before you buy. A needs analysis can help you determine how much life insurance you should buy.
Do I Have to Have Life Insurance?
Before you consider how much life insurance you need, it’s best to understand why life insurance is important.
Life insurance is a key part of any financial plan, helping ensure that your family’s financial future will be taken care of if you were to pass away.
The death benefit from a life insurance policy can cover a variety of costs, including final expenses, college tuition, mortgages, and more.
Related: Life Insurance & Financial Wellness for Women >
How Do I Determine How Much Life Insurance is Needed?
Consider Current and Future Expenses
A good life insurance needs analysis will take into account the immediate, ongoing, and future expenses. Immediate expenses comprise the total cost of a funeral and any outstanding medical bills. Instead of purchasing life insurance exclusively to replace income, individuals should consider whether they want their policy to allow their loved ones to pay off debts. Typically, people want their families to be in a position to pay for expenses when they die.
According to the 2024 Cost of Dying Report, the largest expense for American families was the funeral, which cost an average of $5,666. In total, however, the average family paid $12,616 to handle everything after the loss of a loved one.
Ongoing and future expenses, on the other hand, may include sending your children to college. Consider whether your kids are likely to spend more time in school and seek advanced degrees. The more detailed you are about the cost of college, the better.
Decide for how long your family would need support, and multiply your annual income by that figure. The multiplier, in this case, might be the total number of years it would take before your youngest child completes high school.
Instead of planning life insurance as an isolated effort, consider buying it as part of an overall financial plan. Once this information is known, you can map the life insurance need on top of the plan. Keep in mind the fact that the death benefit from life insurance is not taxable. This means that it can be a simple and versatile way to provide monetary support to loved ones left behind.
Read more about life insurance and taxes >
Consider What You’re Worth to Your Family
To help determine the amount of life insurance to purchase, consider looking at your lifetime economic value. The formula is based on your answers to the following questions.
- How old are you?
- How much do you pay in taxes?
- How much do you earn before taxes?
- At what age are you planning to retire?
- What is the value per year of the chores you do such as mowing the lawn, chauffeuring kids, or whatever role that your survivors would have to pay someone else to do?
- How much do you receive in employee benefits, such as contributions to retirement savings?
- How much will your family need for things like clothing, food, and transportation?
Also, a good needs analysis considers how much income the death benefit from the life insurance policy is likely to bring if it’s invested. The decision of how much life insurance to purchase should be guided by how it will allow your family to live following your death. You might be gone physically and emotionally, but with proper planning, you will always be present financially.

Never Underestimate Needs
Most individuals underestimate the amount of life insurance they should purchase. This is the biggest mistake you can make. For instance, if you received a salary of $5 million upfront, you’d look at that money differently and you’d protect it differently. Many are able to earn more than $5 million over the course of their career, but a higher percentage of this group doesn’t think in those terms when buying life insurance.
Do not skimp. Purchase a little more coverage than you think you’ll need instead of purchasing less.
Keep in mind that your income will most likely increase over the years and so will your expenses. While it’s hard to pinpoint how much these will rise over the years precisely, a cushion helps ensure your family members can maintain their lifestyle. To ensure that you don’t leave your family members with too little money to live on, it would be advisable to consider taking a comprehensive review of your family’s needs. Be sure to talk the numbers through with your partner.
Life Insurance Needs Approaches
There are a few different approaches that can be used to determine how much life insurance you need:
- The Multiple-of-Income Approach: this is the simplest method and has an essential goal of replacing the insured’s salary for a set number of years. As a good rule of thumb, many people follow the simple “10x” rule, which means taking your annual salary and multiplying it by 10.
- For example, if you currently provide a $100,000 annual income for your family, then $100,000 x 10 = $1,000,000 in life insurance coverage.
- The DIME Method: this method involves adding up four factors (Debt, Income, Mortgage, Education) to figure out how much coverage is best
- Human Life Value Approach: this approach considers your age, gender, occupation, earnings, and employee benefits. It involves several steps:
- Estimate your salary earnings, from now until a specific point in the future (typically your planned retirement age), including future wage increases.
- Subtract your annual taxes and living expenses from the total over this amount of time.
- Take the remaining total and select an assumed rate of return; subtract this amount.
- Add the cost of additional benefits, including health care. These benefits have value and will need to be replaced when you pass away.
- Capital Needs Analysis: this is the most widely used method. It accounts for the need to replace income and specific needs of survivors. It includes:
- Current and future income of both you and your spouse.
- Immediate lump-sum needs after death, including end-of-life expenses, debt, and mortgage payments.
- Future expenses, such as college tuition and weddings.
- Existing family assets, retirement funds, or insurance policies.
Related: How Long Will My Life Insurance Policy Support My Family? >
Free Life Insurance Coverage Digital Worksheet
WAEPA provides exclusive Group Term Life Insurance for current and former Civilian Federal Employees – up to $1.5 million in protection.
Feel free to use our free life insurance coverage calculator to see what level of protection is right for you, based on your unique needs.
Get started with our free coverage calculator below!
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