When I went looking for life insurance years ago, the recommendations I got were all over the map. Various insurance professionals and online calculators came up with very different answers - it was almost impossible to tell where the numbers came from.
The truth is, there’s more than one right answer. There’s a range of reasonable choices for each person, and where you choose within that range depends on factors like your personal financial situation and goals, what your family would do if you weren’t there, how much your life insurance costs, etc.
Whether you are generating income today or providing care for free (or both), your loved ones would be seriously disrupted if you were gone. The check from the life insurance company ensures that enough of your income is replaced or someone else can be paid to provide care for the people who depend on you today.
Beware the Bad Advice (There’s A Lot of It)
While there is more than one right answer, you have to be careful because there are many wrong answers, too. Popular rules of thumb like “buy 10x your income” are often just flat-out wrong (particularly for people in their 20s, 30s or 40s, where following that “rule” would often leave their loved ones in a bad place if something happened to them).
At the other extreme, you have excessive coverage recommendations that are so expensive that the payments “crowd out” other things the person should be doing with their money - like funding an IRA or 401k. Retirement savings are not a substitute for life insurance, but you need to balance the risk you die early with the possibility you live a long time and need savings to fund you in retirement for decades!
Too often, the industry pushes as much insurance on you as they think they can get you to buy. (I’d guess this is because - all else equal - more insurance equals bigger commissions.)
Sometimes the problem goes the other way, with the industry not applying the time (aka expense) to make sure people really understand what they’re choosing for themselves and their families, and individuals end up dangerously under-insured.
Our approach at AboveBoard is to make our calculation totally transparent, and we’ll happily guide you through where the numbers came from, and get your feedback about whether it correctly reflects your situation and goals.
Here’s what we don’t do: push, cajole or frighten you into a number that we have prescribed, or evade specific questions about how we came up with our numbers. I experienced enough of that as a consumer, and I know how unpleasant it is. When I started AboveBoard’s insurance business, I wanted to deliver the kind of informed, clear advice that I had been seeking.
How Much Income Your Family Would Need Replaced
Picture two families with identical financial situations and lifestyles today, living in a higher cost-of-living area. Despite these similarities, they could still have pretty different insurance needs.
One family might feel that they cannot imagine life anywhere else, and would want their children to be raised there and attend private school, even if something happened to one - or even both - parents.
The other family might feel that - if something happened to one or both of them - the kids (and any surviving parent) would move back home with a set of grandparents who live near great public schools and could help out with the kids.
Who needs more life insurance? Definitely the first family. Because the percentage of income they’d need replaced is higher, because the expenses of the surviving family are much greater.
Needs vs. Wants
You need essential life insurance, but how much “life insurance cushion” you are willing and able to pay for is up to you.
Your “essential” life insurance is the amount that your family would need to be spared the pain of being forced into choices that would make them even sadder if you were gone: moving out of their home for financial reasons, being pulled out of a school that could have provided stability during a terrible time, etc. You definitely need to carry enough that your family’s pain is not compounded by financial distress.
However, there’s a cushion above that bare minimum that is more discretionary - you can decide how much you’re willing to pay for.
Many people like the idea that - if they learned they would likely finish this life before they had hoped - they could live their final months or years knowing that their family will be amply provided for. But you obviously have to balance that desire with the practicality of not having your life insurance payments be a burden.
Recommended Next Steps
We built the calculator in our interactive Life Insurance Guide to help people easily figure out the right coverage amount. It starts with reasonable assumptions that are right for many people, and also allows you to change those assumptions if you feel like the starting recommendation isn’t clearly the best fit for you. Feel free to ping us on chat when you’re there with any questions - we'll help you get it right.
To learn more about our interactive Life Insurance Guide’s coverage calculator, check out either or both of these posts:
- Overview of AboveBoard’s Life Insurance Coverage Calculator
- A Deep Dive on AboveBoard’s Life Insurance Coverage Calculator (written for my fellow math & finance nerds, and anyone else who wants the nitty gritty)