Sep 23, 2019

How Much Life Insurance Do I Need?

The basic rule of thumb recommended by the Life Insurance Marketing & Research Association (LIMRA) is to multiply your yearly income by 7 if you have few dependents and few debts, and by 10 if you have large debts and a large family.

According to LIMRA, the typical U.S. household with life insurance owns enough to replace 3.6 years of their income.  Meaning, many Americans with insurance are probably underinsured.*

Is the ‘7-10 Rule’ accurate today?

When paying the families of the victims of the September 11th attacks, the Victim Compensation Fund valued the future earnings potential of the deceased at 16 times their income. 

When existing life insurance and other assets were deducted, their future earnings value was estimated at more than 11 times their income.  In the end, the average amount awarded to the families of the 9/11 victims exceeded $2 million.*

The ‘Needs Analysis’ method

Financial planners use a more detailed method of determining how much life insurance is needed called ‘needs analysis.’  The philosophy behind this method is to purchase enough life insurance so that your family can live off the interest of the proceeds.

Financial planners go about this by analyzing how much income your family will need each year and then determining the life insurance amount needed by using this formula: 

Annual Income Needed ÷ Rate of Return on Investments = Face Amount of Insurance

To see how much life insurance this method recommends, try using the ‘needs calculator’ on the Life and Health Insurance Foundation for Education web site.

Buy what you can afford

Whatever method you use to determine your life insurance needs, you may come up with a rather large figure. 

“Even if you can't afford the entire amount of insurance you need, buy what you can afford and build from there,” says Life & Health Insurance agent Barbara Gulin.†

The life insurance you set aside today could one day determine your family’s financial future.  Use the methods discussed here as a starting point to give you an idea how much life insurance you should set aside. 

In the final analysis, you may simply want to purchase as much life insurance as you can comfortably afford.

*Life Insurance Marketing & Research Association (LIMRA) International, The Facts of Life & Annuities,, 2009.
†Barbara Gulin, “How Much Insurance Does a Person Need?’ eHow Money, November 2010.

This article is provided for general informational purposes only and is not intended to provide individualized business or legal advice.  The information contained in this article was compiled from sources that Affinity considers to be reliable; however, Affinity does not warrant the accuracy or completeness of any information herein.  You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article.