Are you worth more dead than alive? How much is the right amount of life insurance? I have found that although most people realize the importance of life insurance, they do not give much thought to how much is the right amount for their situation.
Most people also assume that they could purchase as much life insurance as they want. You may be surprised to learn that insurance companies actually will not allow you to be worth more dead than alive. No asset can be insured for more than its current economic value, whether it is a car, a house, or a human life.
The amount of life insurance for which you can qualify is based on your current age, annual income, assets, and debts. This is called your “human life value,” and it represents the economic loss which those who are financially dependent upon you would suffer if you were to pass away, such as family members, business partners, or creditors. Similar calculations based on age and income are also used by the courts to determine appropriate wrongful death awards, and were used by the administrators of the September 11th Victim Compensation Fund to determine how much should be paid to the family members of those who had been killed in the terrorist attacks of September 11, 2001.
Of course the economic loss is only a tiny sliver of the total loss suffered when a human life is lost. The value of a human spirit could never be fully replaced. Each person’s talents, love, experience, wisdom, example, creativity, future capacity to give, and service to society are irreplaceable. That is why each of us will always be worth more alive than dead, no matter how much life insurance we carry. The only thing insurance can do is help to compensate for the economic loss. Thus, fully insuring our human life value is the least we can do for those who are dependent upon us.
The following are typical human life value calculations (insurance company underwriting guidelines for income replacement):
| Age | Maximum Life Insurance |
| 20-29 | 30 x income |
| 30-39 | 20 x income |
| 40-49 | 15 x income |
| 50-59 | 10 x income |
| 60+ | 5 x income |
In other words, if you are 35 years old and make $100,000 per year, the total maximum amount of life insurance for which you could qualify with any combination of insurance companies is $2,000,000. If you are 45 years old and make $250,000 per year, your total available coverage is $3,750,000. If you are 55 years old and make $500,000 per year, the max you can get is $5,000,000, and so on. Unless you own substantial assets, I recommend acquiring a life insurance death benefit equal to your full human life value in order to provide adequate income replacement for your family. It is not merely a debt payoff tool.
Non-working spouses also make a significant economic contribution to the family even if they do not earn an income. Have you ever thought about how much it would cost to hire other people to do everything your spouse does for your family if he or she were to pass away? In addition, maybe you would want to work fewer hours so you could take over some of those roles yourself and spend more time with your kids. Therefore, it is also important to acquire life insurance on a non-working spouse, especially if you have children living at home. The maximum amount for which a non-working spouse can qualify is usually around half the amount the working spouse carries.
Human life value can also be determined by a person’s net worth, which is the difference between total assets and total liabilities. For estate planning purposes, insurance companies are usually willing to offer a death benefit equal to the net worth of an individual if it would result in a higher death benefit than the income calculations listed above.
Adam Dawson, CFP® is a Principal at Capstone Capital and the author of Timeless Principles of Financial Security.
