How Much Life Insurance You Actually Need (A Fee-Only View)

Key takeaways

Life insurance replaces income and pays off obligations; it is not an investment and should not be sized like one.
Calculate the need: years of income to replace plus debts and goals, minus what the survivors already have.
Level term insurance covers the need for a fraction of the cost of permanent policies, and the need usually ends before retirement.
We do not sell insurance, which is why we can tell you when you need less, or none.

Life insurance gets sold far more often than it gets planned. The amount comes from a rule of thumb or whatever the agent's software spits out, the product is whichever one pays the agent best, and the policy stays in force long after the reason for it is gone. We come at it from the other direction. What would your family actually need if you died this year, and what's the cheapest reliable way to provide it?

What life insurance is for

Life insurance replaces what your death would take from the people who depend on you: your income, your unpaid work at home, and the ability to pay off debts and fund goals like a kid's education. If nobody depends on your income, you need little or none. If a spouse and young children do, you may need a great deal, for a period of years.

That framing knocks out the two most common mistakes. It isn't a savings vehicle, so don't size it by how much you can afford to put in. And for most people it isn't a permanent need, because the kids grow up, the mortgage gets paid off, and the retirement accounts eventually replace the paycheck.

The calculation

We build the number from the family's actual situation, not a multiple of salary.

1. Income to replace. Take the after-tax income your household would lose, subtract the survivors' own income and the expenses that would end with you, and multiply by the number of years the replacement is needed. That's typically until the youngest child is independent or until the survivor's retirement assets could carry them. A 40-year-old earning $180,000 with a spouse who earns $90,000 and two children under ten might need to replace roughly $100,000 a year for fifteen years.

2. Obligations and goals. Add the mortgage balance if the plan is for the family to stay in the house, other debts, expected college costs, and a reserve for the transition year.

3. Subtract what already exists. Savings and investments that would be available, group coverage through work, Social Security survivor benefits for a spouse caring for children under 16 and for the children themselves, and any pension survivor benefit.

What's left is the gap. In the example above it might land somewhere between $1.5 million and $2 million. For a couple with no children, two incomes, and a paid-off home, it might be zero.

We discount the income stream rather than just multiplying, since the death benefit gets invested and drawn down over time. And we build in a margin, because the survivor shouldn't have to make every decision perfectly in a terrible year.

Term versus permanent

For a need that lasts fifteen or twenty years, level term is the right product almost every time. A healthy 40-year-old can typically buy $1.5 million of 20-year term for well under $100 a month. The same death benefit in a whole life or universal life policy costs many times that, because the premium is also funding a cash value account with its own expenses, plus a commission that's often a big share of the first year's premium.

The pitch for permanent insurance is that term "expires worthless." Yes. That's what it's supposed to do. You buy it for the years when your death would be a financial catastrophe for other people, and when those years are over you stop paying. Fire insurance on a house you've already sold isn't a bargain just because it's permanent.

There are narrow cases for permanent coverage: a lifelong dependent with special needs, an estate big enough to face federal estate tax (the exemption is $15 million per person in 2026, so this is rare), a business buy-sell agreement, or a specific legacy goal where the policy sits in an irrevocable trust. Even then, buy the policy for the death benefit, price it competitively, and compare it against simply investing the premium difference. Our review of indexed universal life sold as a retirement plan covers the product that gets sold most often outside those cases.

Coverage through work

Group life insurance is convenient and often a decent supplement, but it has three limits. It's usually capped at one or two times salary, well below most families' need. It ends when the job does, sometimes at the worst possible moment. And it's priced for a group, so a healthy person can often buy an individual policy for less. We treat group coverage as a layer, not the plan.

Laddering the need

Since the need shrinks over time, the cheapest structure is often two or three term policies of different lengths instead of one big one: a 20-year policy for the years with kids at home, a 10-year policy for the mortgage, and maybe nothing beyond that. As each policy expires, the coverage steps down along with the need. It costs less than a single large 30-year policy and it matches the shape of the risk.

When the answer is zero

A meaningful share of the people we review don't need life insurance at all. Retirees whose portfolio and Social Security would support the survivor. Single people with no dependents. Couples with two incomes, no children, and enough assets to cover the mortgage. For them, the right move is to let the policy lapse when it expires, or to stop paying for a permanent policy that no longer does anything. Whether to keep life insurance in retirement is its own question.

Why our view is different

We don't sell insurance, and we get nothing when a policy is bought. That's the whole reason we can say "less" or "none" when the math supports it. When coverage is needed, we specify the amount, the term, and the structure, and send clients to an independent agent who can quote across carriers. Then we check that the policy that issued matches what we recommended. That's what risk and insurance review means here.

Frequently asked questions

Should I insure a stay-at-home spouse?

Usually yes. The work they do would have to be replaced, at a real cost, if they died. A term policy sized to childcare and household costs through the children's dependent years is often the right answer.

Is ten times my salary the right amount?

Rules of thumb are a starting point, not an answer. Ten times salary overstates the need for a household with a second income and real savings, and understates it for a sole earner with young kids and a big mortgage. The calculation takes twenty minutes. Do it.

Should I buy a policy on my children?

Rarely. Children don't have income to replace. Small policies sold as savings for children are among the worst-value products in insurance. A 529 plan does more with the same money.

What about return-of-premium term?

It refunds your premiums if you outlive the term, at a price that's typically 30% to 50% higher. Investing the difference yourself almost always comes out ahead.

Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph

This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.