Maybe you just got married or started a family; maybe you’re about to build or buy a new home; or, maybe you’re on the brink of retirement. Whatever major life change you’re about to encounter, you need to encounter it with the right amount of life insurance.

Nobody wants to think about the end of their life. In fact, the day I brought up our life insurance needs with my husband was one of the gloomiest I can remember. “Do we have to do this now?” my husband asked, hoping to put off the dismal discussion til another day. But it couldn’t wait: I was about to leave my cushy full-time job – along with the term life insurance policy that came along with it – and felt we needed to sit down and evaluate what we needed, and just as importantly, what we didn’t, before I gave my two weeks’ notice.

Many life insurance calculators don’t take into account much more than you or your spouse’s annual pre-tax income, basing your life insurance needs off that number alone. But such a simple calculation doesn’t take into affect the million shades of gray. Take, for example, two married couples.

Couple A

The husband and wife who comprise Couple A are both 40-years-old. Husband A works as a business executive, where he earns $300,000 a year pre-tax. Wife A is also a professional, working as a lawyer; she earns $150,000 annually. Couple A doesn’t have any children, but they do have two mortgages – one on their main residence, totaling $375,000, and a second mortgage on a vacation home, totaling $225,000. Although they’ve paid down roughly a quarter of the principal on their main residence, they took out an interest-only loan on the vacation home and have yet to put anything to the principal on that property. Both husband and wife max out their retirement contributions, as well as take advantage of both their employers’ 401(k) match program. All told, their retirement savings already total over $800,000.

Couple B

Husband and Wife B are both 30 years old. Unlike Couple A, Couple B have a much lower pre-tax income. Husband A is an accountant, earning $70,000 a year; his wife stays at home, where she takes care of the couple’s 6, 4, and 1 year old children. They purchased their starter home 5 years ago for $175,000. In addition to their monthly mortgage payments, they’ve also paid extra down on the principal, giving them just $100,000 remaining on the mortgage, and live relatively debt free otherwise. They’ve saved a modest nest egg, with $10,000 in savings and another $40,000 in retirement investments.

Who Needs More?

Look at the examples above, you may be tempted to think that Couple A would need markedly more life insurance than Couple B. After all, Couple A earns a combined $450,000 annually and has two mortgages with outstanding balances totaling more than half a million dollars. Meanwhile, Couple B makes just a fraction of Couple A’s income – Wife B doesn’t even work – and have already paid down a sizable portion of their mortgage. But this simple analysis overlooks a few key factors for both couples:

  • Couple A already has a nest egg encroaching on a million dollars
  • Couple B has three young children to care for and, ultimately, send to college
  • Just because Wife B doesn’t work doesn’t mean she doesn’t contribute to the family’s bottom line; her presence at home means the couple doesn’t have to pay for child care

Because term life and permanent insurance policies are taken out by the individual – not jointly by the couple – let’s see which of the four individuals needs the most life insurance, the life insurance calculators at Smart Money and LIFE Foundation:

  1. While you may be tempted to think Husband A would need the most life insurance, it’s actually Husband B who comes in tops here. As the sole wage earner in Couple B, Husband B’s death would have the greatest impact on his family’s finances. His death would force his wife to return to the workforce. Even assuming she could earn $35,000 a year for the next 25 years, the costs of paying for her children’s care while she’s at work and their future college expenses ups the ante for this couple. Husband B needs a policy worth more than a million dollars to support his family in the event of his death.
  2. You guessed it – Husband A comes in number two here. Couple A accepts the fact that if one of them should die, the other wouldn’t need to replace the income lost by the other’s death. Even considering the average cost of final expenses – between $10,000 and $20,000 – and the couple’s $500,000 in outstanding mortgages, Wife A makes enough to fully support herself in her husband’s death. Assuming she could pare down her living expenses to $100,000 a year until her planned retirement – hopefully when she’s 60 – a policy between half and three-quarters of a million dollars would be enough to help her pay down the larger debts.
  3. Again, it’s Wife B who requires more life insurance than Wife A. This may be a surprise, since Wife B doesn’t work. But with three young children in the home, her death would require her husband to pay for child care while he’s working outside the home. A $250,000 to $350,000 policy should more than cover her final expenses and child care costs until her youngest child comes of age.
  4. Wife A needs the least amount of life insurance of anyone in this group. Why? Husband A also knows he could live on $100,000 a year if he had to – but his large income more than makes up for this. Even though taxes slash his pre-tax income by 35 percent to just under $200,000 a year, his earnings negate the need for his wife to take out a life insurance policy at all.

The Last Word

Of course, there’s the unquantifiable aspect of gauging your family’s life insurance needs: comfort. Do you have to maintain your current standard of living, or could you live off less, like Couple A? Would it cost you more in additional expenses if your spouse were to pass away, like Couple B? How much money do you need to feel secure in your finances? There’s no formula that will take into account your peace of mind.

Libby Balke

Libby Balke