Published: April 08, 2006 10:12 pm      

Just how much life insurance do you really need to buy?

Here’s a reliable rule-of-thumb when it comes to buying the right amount of life insurance: There is none.

While it’s easy for some so-called “experts” to say everybody needs life insurance protection equal to 10 or 20 times their income, the truth is everyone’s situation is unique and the amount you need can only be determined by looking at your individual circumstances.

Having the wrong amount of life insurance can be devastating for your survivors and “one-size-fits-all” recommendations can leave you under protected. In fact, according to a 2004 report by the life insurance industry’s research association LIMRA International, the average person is underinsured by more than $300,000. The study also found that 45 percent of widows (35 percent of widowers) say their spouse was inadequately insured. And one to two years after the death, half the widows and one third of the widowers are just getting by financially.

As you try to decide how much life insurance you need to reach your personal and financial goals, there are many questions you need to ask yourself. Here are just a few:

Is it important to ensure that your survivors — whether they are parents, siblings, spouses or children — can take care of their financial obligations after you’re gone?

Do you want to make sure those who depend on your income and support have the means to maintain their current standard of living?

Is it important for you to make certain your children will have the money to pay for a quality education even if you are not around?

How will your spouse cope with your death? Will he or she need to take time off to grieve after your death? Will he or she need assistance around your home? Will your spouse need counseling to recover?

Will estate taxes be an issue? Add up the value of your home, cars, investments, pension, 401(k), life insurance proceeds and other assets. If the total exceeds the lifetime exclusion amount, your estate may be subject to estate taxes. Life insurance can help replace assets that may be lost to taxation.

Once you have determined your goals, there are many other factors that will have an impact on the amount of life insurance you need. Here are 10 of them:

1. Age and number of family members

2. Blended families

3. Risk tolerance/investment objectives

4. Existing planning, savings, life insurance, investments, retirement programs or other assets

5. Current and expected income

6. Estate tax liability (current and expected)

7. Current health

8. Children with special needs

9. Expected inheritance

10. Budget

While this is not a complete list, it gives you an idea of the considerations that should be included in proper life insurance planning. The impact of these factors should also be measured in relation to each other.

Because there are so many considerations and everyone’s situation is unique, answering the question of “how much do I need” is not always easy. Many people become overwhelmed and put off buying any life insurance because they don’t know how much or what kind they should have. Meeting with a trained financial professional who understands your individual needs and goals can help you determine the right amount that makes sense for you.

The bottom line is this: Having or not having the right amount of life insurance when you die can have a dramatic impact on those who depend on you. It is a personal decision too important to rely on a “one-size-fits-all” recommendation. Don’t make the mistake of having the right amount of life insurance … for someone else’s circumstances.

— Michael A. Oliverio II is a financial representative with the Northwestern Mutual Financial Network based in Morgantown for The Northwestern Mutual Life Insurance Co., Milwaukee. Call 304-292-3339 or

e-mail michael.oliverio@nmfn.com.