How much life insurance do I need?

how much life insurance do I really need?

If you have a family or anyone else that depends on you, you should probably look into getting life insurance.

As an estate planning attorney in Austin, I don't sell insurance. Therefore, I can give you an unbiased assessment of your life insurance need.

In the video below, I walk through different approaches to how one might answer the question of how much life insurance one might need.

Before you google life insurance and start getting bombarded by invitations from brokers and companies, it would be wise to figure out on your own first, how much life insurance you might need.

Avoid the anchoring effect

If you go blindly into the marketplace, whatever amount an insurance company or broker gives to you as the appropriate life insurance you require will be anchored in your mind. They obviously have an incentive to suggest a high number.

Then when you see the high premiums, you will likely pare back on the coverage number. In that event, you are already anchored to the insurer's number, and playing their game by using it as a reference point.

Rather, by using one or multiple of the approaches discussed in the video below, you have an idea of what amount of life insurance needs you might require to protect your family. This provides you with the ability to go out into the market with a number - rather than naively accepting the insurance industry's assessment of your potential need.

In the first approach to the question, I estimate potential costs. This leads to a pretty big number which is based on guesses.

For the second approach, I use the present value of an annuity formula to arrive at an estimate for how much insurance one might need. This is based on the insured's current income, a discount rate, and the number of years of coverage required.

The third approach uses a capital retention approach based on the present value of a perpetuity.

Finally, I use an income retention which is an extension of the human valuation approach. It takes into consideration the uninsured's income. As such, the insurance need is lower.

Life insurance has a role in both retirement and legacy planning

In future videos and posts, I will further explore the role of life insurance in retirement and estate planning.

In the retirement context, perhaps you can choose between a higher single life pension or a lower joint life pension. It might make sense to take the first option and secure your partner's financial security with life insurance on the pension recipient.

In addition, you might choose a life insurance policy with a long-term care rider. This can be cheaper than buying long-term care by itself. In this way, you can maintain retirement income and legacy assets in the event of a healthcare crisis

Moreover, families with closely-held businesses can use life insurance to equalize their legacy goals between participating and non-participating children. The owners could transfer interests in the business to those children interested in carrying it forward. The owners could equalize that transfer with life insurance for the non-participating children.