This is a question I have faced a number of times when meeting with clients. Unfortunately, there is no pat answer for everyone. Whether you need insurance is determined by your individual situation. A good place to start is to look at the cash flow statement you prepared for yourself. How much money do you have coming in every month? How much is going out? If something were to happen to you, would your family, or heirs, have enough money to eradicate your debt and pay off any other types of estate costs? If the answer to the last question was no, then perhaps you should investigate some form of life insurance.

A good rule of thumb as to whether you need insurance focuses on whether or not you are married and/or have children. Generally, those individuals who don’t have children have a decreased need for life insurance. That’s not to say that just because you don’t have kids, you don’t need insurance. You might. But, typically, single people with no children are in no need of life insurance. Again, though, this really depends on your particular situation. Life insurance is designed to provide financially for your dependents after you are gone. Therefore, if you have no dependents, you may not need insurance.

Likewise, as you grow older, your insurance needs change. For example, when you have younger children, your need for insurance is greater than after they have grown up and moved out of the house. At that point, they would no longer be your dependents, so you wouldn’t need to provide for them financially. Plus, as you build your assets, your need for life insurance should also decrease. This is because you would be more able to self-insure, and your dependents and heirs would be able to pay off any debts or estate costs by using money that is already there. But, if your spouse has already died, you may need more coverage. This will depend on what type of estate you have amassed. As you get older, you will also need to consider what types of retirement benefits you will receive, such as social security or pension benefits from your employer. These will also affect the amount of coverage you need.

HOW MUCH INSURANCE DO YOU NEED?

Now that you have established whether or not you need insurance, deciding how much coverage you actually need becomes your focus. Putting a price on your life may seem like an overwhelming task, but it’s important. While pulling a number out of thin air and using that as your coverage amount might seem like an attractive idea, you could wind up with too little coverage, which wouldn’t suit your needs. Or, you could wind up paying more than necessary because you have too much coverage.

The three main ways of calculating how much insurance you need are the rule-of-thumb method, human needs approach, and capital preservation approach. The rule-of-thumb method says that your coverage should be about five times your gross income plus your mortgage, debts, funeral expenses, and other funding needs. As long as your situation is pretty normal and you don’t have any outlandish expenses, the rule-of-thumb method should work well for you.

The human needs approach focuses on what your family will need after you are gone. It takes into account your final estate and funeral expenses, estate settlement costs, and the amounts of money needed to pay off your mortgage and other debts. It also factors in the fact that your children will need income until they are of legal age and that your spouse may need income for the rest of his or her life. Any special needs and college costs must also be added to the mix. From that total, any social security or veteran’s benefits should be subtracted. Finally, it is assumed that if your family takes a lump sum and invests it wisely, the principal and income will be enough to provide for their needs.

The capital preservation approach is similar to the human needs approach because it considers all the financial needs of your family. However, with this method, your family’s needs are met with the income earned from your assets. The assets would stay intact for your beneficiaries.

Deciding which method is best for you may be a little time-consuming, but it’s worth it. (See table below  for comparison of premiums.) Plus, if you have hired a financial advisor, that person is more than capable of helping you decide how much coverage is necessary.