How Much Life Insurance Do You Actually Need?

Calculate the annual shortfall survivors would face, how long it lasts, and any separate lump-sum needs. Then subtract resources already assigned to those purposes. This produces a coverage target tied to the household’s spending and obligations.

The NAIC’s consumer guide organizes the decision around dependents, income, debts, final expenses, and affordability. The worked worksheet below uses hypothetical household figures; replace each input with your budget, balances, and coverage. Sources were checked November 3, 2026.

Start with the household shortfall

Separate ongoing spending from expenses that would be paid once. Ongoing costs might include housing, food, transportation and replacement care. One-time amounts might include a debt payoff or a separately defined education goal. Estimate resources available to survivors on the same basis: annual income belongs beside annual expenses, while available savings belong beside lump-sum needs.

If annual survivor spending is $60,000 and continuing net income is $36,000, the annual shortfall is $24,000. Specify its duration before converting it to a lump sum. Keep ongoing earnings beside ongoing expenses, and savings beside lump-sum needs.

The household’s spending after a death may differ from its current spending. A surviving parent might need additional childcare or reduce work hours. Some expenses may end. Document those assumptions instead of replacing the deceased person’s gross salary dollar for dollar without examining the budget.

A worked coverage-gap example

This worked example assumes a $24,000 annual gap for 12 years, separate debt and education goals, and resources already available. It totals the amounts without inflation or investment growth:

Component	Assumption	Amount
Ongoing household gap	$24,000 annually for 12 years	$288,000
Mortgage payoff goal	Separate from the annual spending estimate	$250,000
Other debt payoff goal	Separately identified balances	$20,000
Education goal	Amount chosen for this example	$80,000
Final and transition expenses	Example reserve	$15,000
Total stated need	Sum of the five items	$653,000
Savings assigned to these purposes	Available lump sum	−$75,000
Existing individual death benefit	Assumed valid and payable	−$100,000
Illustrative additional gap	$653,000 − $175,000	$478,000

The mortgage row assumes the annual spending estimate excludes the mortgage payment being eliminated. If the ongoing budget already includes that payment for the entire period, also adding a full payoff can double-count the same obligation. Property taxes, insurance and maintenance still require their own budget assumptions after a mortgage is paid.

Refine the starting $478,000 gap for inflation, investment assumptions and taxes, changing survivor earnings, and the dates education costs or benefits begin and end. Use separate rows when a cost changes substantially during the support period.

Test the assumptions before shopping

Using the same example, reducing the annual shortfall to $18,000 lowers the 12-year income component to $216,000 and the additional gap to $406,000. Increasing it to $30,000 raises that component to $360,000 and the gap to $550,000. That is a $144,000 range created by changing one budget assumption.

A $24,000 annual gap totals $192,000 over eight years or $384,000 over 16 years before inflation or investment effects. Create separate rows where one dependent’s support ends earlier than another’s.

Do not subtract savings twice. If the same $75,000 has already been committed to a separate obligation outside the table, it is not fully available for this calculation. Identify account ownership, access and any competing purpose before counting a resource. Keep employer insurance in a separate line until its continuation terms are understood.

Include unpaid work and distinguish debt responsibility

Include unpaid work survivors would need to replace: childcare, school transportation, and support for older relatives. Price the actual local services and expected hours, then add them for the years the household would need them.

Debt also needs closer examination than copying every balance into a survivor’s personal bill list. The CFPB explains that debts generally belong to the deceased person’s estate. Survivors can have responsibility in circumstances such as co-signing, joint borrowing or applicable state marital-property rules. Being an authorized credit-card user is different from being a joint account holder.

Decide which assets survivors want to retain, such as the home, and which debts the estate or a survivor is responsible for. Keep the asset-preservation goal separate from legal liability; an estate or consumer-law attorney can resolve uncertain responsibility.

Match the policy’s duration and guarantees to the need

The Texas Department of Insurance guide distinguishes term insurance, which covers a specified period, from permanent insurance with cash-value features. Term coverage generally starts with lower premiums. Permanent coverage can require substantially higher premiums, and cash surrender charges or loans can affect what remains available.

A time-limited income gap and an ongoing lifelong support obligation are different problems. Compare the actual contract’s duration, renewal terms, conversion rights and premium guarantees. A term-to-permanent conversion feature may avoid new evidence of health, but deadlines and the cost of the new policy matter. Whole-life dividends are not guaranteed.

For this household, list what remains after years 8, 12, and 20. Match policy duration to those obligations and use the guaranteed values in the quote to judge affordability. Record cash surrender value and death benefit in separate fields.

Check what happens to employer coverage

Check the employer plan’s portability and conversion options before assuming coverage ends with the job. Portability generally continues eligible group term coverage, while conversion moves eligible coverage to an individual policy under the plan’s rules.

For a concrete example, the University of Texas System’s published rules allow eligible voluntary term participants to apply for portability and describe conversion to an individual whole-life policy. Its instructions require the relevant application to its benefits office within 31 calendar days of losing coverage. Portability has a one-year prior-coverage requirement for employees and spouses; conversion has a five-year requirement. Other eligibility restrictions apply, and these are that employer’s rules, not a nationwide deadline.

Record the employer benefit’s amount, termination event, continuation options, application deadline, and resulting premium. Keep current coverage and coverage available after departure on separate lines in the worksheet.

Compare actual offers and maintain the policy

The NAIC buyer’s guide explains that underwriting can involve health questions or an examination. Compare the issued premium, benefit, and conditions before accepting coverage, and keep existing protection in place until a replacement is effective.

Request quotes with the same benefit amount, duration, and required features. Compare issued premiums, guaranteed periods, exclusions, riders, and later increases, then confirm the effective date. The term-versus-whole-life comparison includes published insurer premium examples to show the cost difference.

Review primary and contingent beneficiaries and make the policy information findable for the people who would claim it. Naming a minor directly creates payment issues; discuss an appropriate arrangement with a qualified professional rather than assuming a child can receive the proceeds directly. Revisit the worksheet after major changes in dependents, debt, employment or available assets. The result should be a documented need and an understood contract, not a permanently fixed salary multiple.