Posted on Saturday, 9th January 2010 by

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This article, updated 2/17/2023, will help you evaluate your total insurance needs and costs.

Inevitably during a new employee orientation, someone would ask, “How much life insurance do I need?”  And another classmate would shout back, “As much as you can get.” Or, “Five to ten times your income.”  As an HR Specialist, I could not advise employees on the amount of insurance they may need – offering benefit advice is specifically prohibited.  However, as a financial planner, I have an opinion, not just for the new employee, but for anyone throughout their career.  Retiring employees often have not evaluated their insurance needs since they began their employment.  Insurance coverage and costs need to be evaluated periodically, especially when there are significant changes such as marriage, divorce or you have a child.

Purpose of the Life Insurance

In determining how much life insurance you need, first ask yourself, “What is the purpose of the insurance?”  Do you need to pay off debts, provide monthly income for a surviving spouse, provide for your child’s care and education, or perhaps pay estate taxes after you die?  Would you like to provide a donation to a charity or fund a scholarship to your alma mater?  Since it is uncomfortable to discuss what you want to happen when you die, this discussion often never occurs; and family members are frequently left without the money needed to maintain their current life style.

Amount of the Life Insurance

After determining what you want the insurance to provide, it’s time to examine how much insurance is required to provide for these needs.  Although a percentage of your income is a general guide to determine insurance needs, it is usually too simplistic for most individuals.  Insurance determined by a percentage of income does not consider variations in family size, ages of dependant family members, income, expenses, debts, existing assets, and personal goals.  When considering how much life insurance you need, you should evaluate your family’s immediate needs, future needs and income for dependants when you are gone.

You can use one of the many capital needs assessment calculators available on the internet, or consult with a trusted financial planner or insurance adviser who has access to a reliable assessment calculator.  The comprehensive calculators will include anticipated inflation rates and anticipated rates of return to help pinpoint the amount of insurance you need.  Below are some of the basic categories to consider in determining the amount of life insurance needed.

Debts and Expenses:

Final expenses (funeral, medical, taxes, legal) $___________

Debts and liabilities (Credit cards, auto, mortgage) $___________

Emergency fund (6-12 months of expenses) $___________

Future expenses (Child care/support, education) $___________

Providing an inheritance or gift $___________

TOTAL DEBTS AND EXPENSES (Add all entries above) $___________


Income Replacement for Spouse and Children:

Annual income needed $____________

Subtract other income sources   –  $____________

(Spouse’s income, monthly rental income, FERS/CSRS annuity)

Adjusted Income replacement     = $____________

Number of years to provide income   x _______   years =



TOTAL NEED (add debts, expenses and income replacement)$______________

TOTAL LUMP SUM ASSETS available (subtract from total need)(Bank accounts, IRAs, TSP, property, current insurance, survivor benefits not included above) $ ______________

TOTAL INSURANCE NEED =  $_______________

Type of Life Insurance

Equally important to selecting the amount of life insurance is determining if you should have temporary insurance or permanent insurance. Temporary insurance provides coverage for a limited period of time, such as 5, 10 or 20 years.  The advantage of temporary insurance is the cost.  Temporary insurance is typically less expensive than a permanent insurance policy.

Permanent insurance on the other hand, provides a lifetime of coverage as long as you continue to pay the premiums, but it is more costly.  Another feature of permanent insurance is that it accumulates a cash value on a tax-deferred basis.  The cash value is the amount accumulated in the policy that would be available to you if you surrendered the policy.  Often the cash value does not accumulate until you have retained the permanent insurance policy for several years.

In reviewing the needs you identified in the worksheet above, are they permanent needs that you will always need at death?  Or are they temporary needs such as funding a college education and providing support for young children?  It is likely that you will have some permanent and some temporary needs.  For permanent needs you should consider permanent insurance such as whole, variable, or universal life insurance.  For a temporary need you would select a term policy.

You may have heard the old adage, “Buy term insurance and invest the difference.”  This advice recommends determining the difference between the cost of a term and a permanent insurance policy.  Then purchase a term policy, and invest the difference between the cost of the term and permanent insurance in stocks or mutual funds.  This approach can meet many people’s needs, unless you have a permanent need for the insurance, such as providing monthly income to a spouse or a disabled child.

One of the drawbacks with many term policies is you have to re-qualify for the insurance periodically, and if you are in poor health you may not be able to obtain the required insurance.  The FEGLI policies automatically renew without requring a new physical. However, like all term policies, the insurance rates may increase to such an exorbitant rate that you cannot afford the insurance coverage needed to protect your family.

Some term insurance contracts have a convertibility provision which allows “conversion” to a permanent policy without submitting additional medical evidence of insurability. This guarantees that you can obtain the permanent insurance without regard to health issues that may have developed since purchasing the original term policy. This could result in a cost savings if your health has deteriorated since the original exam. This is a beneficial option to have in case circumstances in your life change, such as an adverse medical diagnosis or the insurance coverage is needed for a longer period of time than originally anticipated.

Linda Duncan

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Disclaimer: The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and benefit information are subject to change. To ensure the accuracy of this information, contact relevant parties for assistance including OPM’s retirement center. Over time, various dynamic economic factors relied upon as a basis for this article may change.

The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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