How Much Life Insurance Is Enough?

The economic value of a life depends on

  • spending patterns
  • income
  • obligations to dependents and others
  • value judgments

There are different ways to estimate how much life insurance you may need

  • capitalization of income
  • capital needs
  • personal income needs

Capitalization of Income (Human Life Value)

The intent is to replace the income lost upon the death of the life insured.

\begin{align} Need = \frac{AnnualIncome }{real Rate Of Return } \end{align}


  • simple


  • ignores other sources of income
  • ignores inflation (e.g., wage growth)
  • ignores how long the capital is needed
  • using only the interest on the capital without using the capital overstates how much insurance is needed

Capital Needs (Capital Retention)

  • reflects
    • final expenses
      • assumes mortgage will be repaid so that the family can remain living in the home (so ignores the market value of the home)
    • ongoing income needs
\begin{align} Need = \frac{Ongoing Income - Ongoing Expenses}{real Rate Of Return} + (Assets - Final Expenses) \end{align}

Memory Aid
Assets - Bills = Cash needs (at death)
Dollars in - Expenses = Funds required (ongoing)
(Funds required) / (real Rate of Return) = Gross value of life
How much insurance = Gross value of life + Cash needs

Personal Income Needs

This formula is not widely used.

Need = Needs and objectives of family during

  • readjustment period
  • dependency period
  • survivor income needs


  • based on the family's needs and objectives
  • considers all financial assets


  • needs regular re-evaluation
  • may ignore inflation
  • ignores estate creation and estate preservation

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