Lesson 3 of 6
How people think about how much coverage they need
After this lesson, you should be able to
list the factors that go into a coverage amount, and explain why a rule of thumb is a starting point rather than an answer.
This page will not produce an amount for you. Not because the arithmetic is hard, but because a number produced by a website that knows eight things about you is a guess wearing a suit. What it will do is show you the factors people weigh, so that when you do work it out you know what you are weighing.
What is being replaced
Income. If people depend on money you earn, the first question is how much of it they would still need and for how many years. A household does not usually need one hundred percent of a lost income forever. It needs enough, for long enough, to get to the other side of the gap.
Debts that do not die with you. A mortgage is the usual one. A co-signed loan is another. Some debts are settled by an estate, some pass to a surviving co-borrower, and which is which depends on the debt and on where you live.
Costs that arrive immediately. Funeral and burial or cremation costs land within days, long before any estate is settled. This is the expense most often left out of the arithmetic, and the one that most often gets put on a credit card or a fundraiser.
Costs that the surviving household picks up. If one adult was doing childcare, someone now pays for childcare. That work had a value even though nobody was invoicing for it.
Goals with a date on them. Education is the common one.
What is already there
Coverage is not calculated in a vacuum. Against all of the above sits whatever the household already has:
- Savings and investments that could actually be used for this.
- A surviving partner's income and earning capacity.
- Life insurance already in force, including any through work. Coverage through an employer is worth counting, and also worth understanding: it is usually owned by the employer, the amount is set by the plan, and it generally does not follow you when the job ends. That is not a reason to dismiss it. It is a reason not to treat it as the whole answer.
- Survivor benefits the household may be entitled to.
| Through your job | A policy you own | |
|---|---|---|
| Who owns it | Usually the employer | You |
| Who sets the amount | The plan | You, within the limits of underwriting |
| If you leave the job | Generally ends, though some plans allow conversion | Unaffected |
| Worth counting | Yes | Yes |
| Worth relying on alone | No, because it moves when your job does | That is what it is for |
About rules of thumb
You will run into shorthand like "ten times your income." Rules of thumb are useful for one thing: getting a person who has never thought about this into roughly the right order of magnitude in ten seconds.
They are not useful as an answer, because they ignore everything on this page. Two people with identical incomes, one with no dependents and no debt and one with three children and a mortgage, do not land in the same place. Treat the rule of thumb as the start of the conversation.
The part nobody puts in the calculator
What you can actually afford to pay, every month, for as long as the coverage needs to last. A policy that lapses in year three because the premium was uncomfortable protected nobody. Affordability is not a compromise on the plan, it is part of the plan.
The questions, in order
Someone working through this for a household would answer, roughly in this order:
- Who would be financially worse off, and in what way?
- What would they need money for, and for how many years?
- What would still be owed?
- What arrives immediately, regardless of anything else?
- What is already in place that could be used?
- What is the gap between four and five?
- What can actually be paid each month, sustainably?
No total is shown here on purpose. The answer to question six is different for every household, and it is the part worth talking through with a person.
An invented household, used to show how the idea works. It is not advice and it is not about you.
Check yourself
Nothing is scored and nothing is recorded. Answer in your head, then open it.
Why is coverage through your job worth counting but not worth relying on entirely?
Because it is real coverage while you have it, but the employer generally owns the policy, the plan sets the amount rather than your household’s needs, and it usually ends when the job does. Counting it is sensible. Building the whole plan on it means the plan changes every time you change jobs.
A household loses an adult who did all the childcare and earned nothing. Is there a gap?
Yes. That work had a value even though nobody was invoicing for it, and the surviving household now pays somebody to do it. Unpaid work is one of the most commonly missed items in this arithmetic, because it never appeared on a payslip.
Why is affordability part of the plan rather than a compromise on it?
Because a policy that lapses in year three protected nobody. A number that cannot be sustained for as long as the need lasts is not a better answer than a smaller number that can.
The one thing to remember
The question is not “how much life insurance should I have.” It is “what would this household need money for, for how long, and what does it already have.” The gap between those two is the answer, and it is different for everyone.
Underneath this lesson
Each of these is a real subject in its own right. They are deliberately not in the beginner sequence, and they are what the Learning Center grows into next.
- Which debts survive you What an estate settles, what passes to a co-borrower, and how that varies by state.
- Survivor benefits What a household may already be entitled to before any policy is considered.
Have a question about your own situation?
This page is general information. What applies to you depends on things a web page cannot know. The conversation is free and carries no obligation to buy anything.
Amber Early, Licensed Life Insurance Agent
CA #4417160 · TX #3543971
Insurance Licensing
Amber Early is an Independent Agent, licensed for life insurance, and is not an employee of any insurance company. This website advertises life insurance. Insurance is the subject of this solicitation.