I’ve never heard anyone say that the death benefit check that they cashed from the passing of a loved one was too big.  On the contrary, there are way too many situations where there are foundations and community fund raising efforts to help those who clearly had too little.

So the big question is, how much is enough?

As in many financial situations, the answer is: it depends.  But the facts upon which the answer depends is not rocket science. It can easily be calculated with a range of assumptions so that the insured person can make an informed decision about how much to have.

The variables to consider are: savings and investments of the survivor, future earnings of the survivor, rate of return on assets post passing and the lifestyle needs (including inflation) of the survivors.  There are many reputable web sites and financial calculators that can help you calculate this need.

Once you decide how much insurance is needed, then decide for how long you’ll need this coverage.  For many people, term life insurance is the lowest entry cost and will do the job.  Term life insurance is simply coverage in exchange for a premium.  It builds no cash value and will deliver a death benefit upon the passing of the insured.  You can but a guaranteed premium for a period of years, such as 10, 20 or 30 or you can but annual renewable term insurance where the premium increases each year.

Many agents recommend the use of cash value life insurance such as whole life or universal life.  These types of contracts generally have much higher entry costs and allegedly lower long term costs for those looking for coverage for their entire life rather than just a specified time period.   These types of policies are referred to as permanent policies because the contract is written to serve those who want the coverage until the day they die – regardless of when that occurs.

I’m not sure which type of coverage is right for you as it is an individual choice based on preferences and facts and circumstances.  But beware the overzealous agent trying to get you to buy a portion of your coverage in permanent insurance as a forced savings vehicle or in case you need the coverage for your entire life.  This only makes sense if you’ve funded all of your life’s other financial needs, such as college and retirement savings, home funding and lifestyle desires.

Focus on the needs, and properly quantifying those needs first and foremost. The number is likely to be larger than you imagine.  Then shop the coverage to suit your budget knowing that you did the best that you can to provide the protection that won’t leave your dependents still financially dependent on someone else’s earnings. This is particularly important for young working couples with younger children.

By John P. Napolitano CFP®, CPA, PFS, MST Founder & Chairman Read More