Life Insurance for Income Replacement: How Much Do You Need?


Your family—the reason you wake up and go to work every day.

Everything you do—from sitting in rush hour traffic to working long hours and pushing toward your next promotion—is for them.

Making the kids happy makes you happy. Whether it’s tossing the ball around with your son or watching your daughter’s gymnastics practice, the memorable moments make all of your hard work worth it. You would do anything to ensure their happiness and well-being.

Quick Article Guide

  1. Protecting Your Family with Term Life Insurance
  2. What is Term Life Insurance?
  3. What About Coverage Through My Work?
  4. The Estimated Approach
  5. The Monthly Expense Approach
  6. The Itemized Expense Approach
  7. Speak with an Experienced Agent

But have you ever thought about what would happen to your family if you were no longer around to provide and do all that you do for them?

How would they pay the bills and maintain the same lifestyle they are accustomed to? Maybe your spouse has a great career as well, but would they be able to sustain paying the mortgage and other monthly expenses alone, without any financial support?

And what about the kids’ dreams and childhood experiences? Would your spouse be able to pay for your daughter’s gymnastics lessons, or your son’s summer baseball tournament out of state? Will they be able to attend college?

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Protecting Your Family with Term Life Insurance

To protect their family financially from an unexpected death and resulting loss of income, most people purchase term life insurance. Term life is typically the most affordable type of life insurance, providing fast, tax-free income to your family if you die.

Life insurance for this purpose is known as “income replacement.” Whether you’re the sole provider for your family or you and your spouse share household expenses, it’s important to ensure that if something happens to you, the surviving spouse and family members will have money for bills and expenses.

Even if you are a non-working spouse, you should still have life insurance so that the working spouse would be able to incur any additional expenses that might arise in the event of your death: day care, dog walking, housekeeping, etc.

Unfortunately for your loved ones, your debts do not die with you. In fact, most of these debts will come due at the time of your death. Your maximum medical benefits can be reached quickly in the case of a terminal illness or extensive surgery. Creditors, particularly medical service collectors, will not show much mercy in collecting on your debts—yet another reason to protect your family with life insurance.

What is Term Life Insurance?

what is term lifeTerm life insurance is best described as pure protection. It provides a death benefit (money paid to your spouse or heirs to cover income loss and assets in the event of your death) at a fixed premium, for a set period of time (your term), with annual renewable terms.

Terms are generally available in 5-year increments ranging from 5 to 30 years, after which the policy will usually become renewable on an annual basis.

Term life insurance is usually the ideal option for young families who don’t have a ton of disposable income, but want to secure life insurance for income replacement.

What About Coverage Through My Work? 

Employer Life InsuranceDue to the rising, mandatory cost of employer-provided healthcare, many employers are doing away with life insurance benefits. In the past, employer-sponsored life insurance was extremely easy to buy, and particularly useful for those with health issues that might make it difficult to qualify for life insurance otherwise. These policies generally provided a death benefit of 1-3 times the employee’s annual salary.

Let’s make one thing clear: 1-3 times your income is certainly helpful and kind of your employer. But it’s not nearly enough to support your family, especially if there are medical expenses that precede your death. If you become seriously or terminally ill, your family will spend whatever it takes to fight for your life. Situations like this often result in bankruptcy and financial desperation, even if the ill family member survives.

Aside from being underinsured, you also run risks relating to the fact that your employer owns your life insurance policy. They can stop subsidizing, raise rates, or even cancel coverage whenever they choose. If you do have the option to take over an employer-provided life insurance policy, rates generally increase every year once you’re off the group plan as the insurer prices you out of what they consider to be a high-risk policy (since you likely didn’t have to take a medical exam). Group plans can also have exclusions for preexisting conditions.

Lastly, but perhaps most importantly, the days of working with one company from entry-level to retirement are largely gone. In an era of personal branding and remote working, “job hopping” has been de-stigmatized. Most U.S. workers change jobs every 5 years, and when they do, there’s almost always a probation period of several months before their new employer’s benefits kick in, resulting in a lapse of coverage.

For these reasons, financial advisors usually recommend working with a life insurance agent to secure a customized term life policy that covers any debts you may have. Employer coverage is best considered as a bonus or subsidy.

The Estimated Approach

The simplified guideline for income replacement life insurance is 5-10 times your gross annual salary worth of life insurance, although everyone has their own unique situation.

There are regulations on the amount of life insurance you can buy in relation to your salary. This is to prevent people from being overinsured. Or, put simply, worth more dead than alive. When applying for life insurance, you’re required to divulge how much coverage (if any) you currently have, and whether you’re replacing coverage or adding to it. You do not need to include your employer-provided coverage, since you’re not the policy owner.

The cumulative amount of insurance you’re allowed to buy is generally based on a multiplier of your current age and gross income, aligning with approximately how many years you have until retirement:

  • 20s and 30s: 30x your gross income
  • 40s and 50s: 15-20x your gross income
  • 60s and 70s: 5-10x your gross income

30 times your income might sound like a lot of life insurance, but really, it just represents a multiple of what your earning power is to your family.

If you’re earning $35,000 a year and you’re in your 20s or 30s, your death would be a loss of more than $1 million, even if you never received another raise! If you’re relatively healthy, a $1 million policy could cost less than $30 a month.

There are some exceptions. For instance, we have clients who were financially able to retire early (not by disability). They aren’t making much money “on paper,” but have a high net worth that is possibly subject to estate taxes. Insurers will allow enough life insurance to cover this potential tax burden, so it is not passed to the insured’s heirs. They will also allow enough to replace a pension.

The Monthly Expense Approach

Some financial advisers suggest a more concise method that involves figuring out your net monthly expenses and multiplying the sum by the term (number of years) you need the coverage for.

  1. Total your monthly expenses and multiply by 12 to determine your annual expenses, or the amount of money that you will need to replace each year.
  2. Multiply your annual expenses by the amount of working years you have left until retirement.

For example: Let’s say that you’re 45 years old and your net monthly expenses are $3,000. By multiplying your monthly expenses by 12, we get your annual expenses of $36,000. Multiply this number by the amount of working years you have left—we’ll say that you plan to retire at age 65. That means you have 20 working years left. $36,000 x 20 years = $720,000. For income replacement, you need a life insurance policy with a $720,000 death benefit.

When you’re comparing quotes for a $720,000 term life insurance policy, consider raising the number if you can easily afford the premium. There are price breaks at every $250,000 increment, so $750,000 might actually cost you less than $720,000. Include in your calculation any planned investments, along with an extra 10-20 percent of padding for inflation. Your agent can also “reverse engineer” your policy if you tell them how much you can afford to pay for life insurance each month.

Insider’s Tip: Don’t worry too much about finalizing your death benefit when you apply. Your agent will only need to know the maximum you wish to consider. When your policy is approved, you can have it issued for that amount or anything lower.

The Itemized Expense Approach

The third common method for calculating income replacement life insurance is to add up what you’d specifically want your life insurance to pay for if you died tomorrow. We recommend using with the acronym DIME:

  • Debt
  • Income
  • Mortgage
  • Education

Debt = Auto and other loans, credit cards, anything else you’d want paid off.

Income = Multiply your income by the number of years your family would need if all your bills were zeroed out.

Mortgage = The balance on what you owe for your family’s home and any other properties.

Education = The amount you’re saving or would want put aside toward your children’s education.

Add these four totals and you will have a solid basis for your life insurance policy.

Speak with an Experienced Agent

You don’t have to (and shouldn’t try to) figure out life insurance by yourself.

jrc can helpWhen you work with an experienced, independent agent like JRC Insurance Group, you can gain peace of mind in knowing that you will find the right coverage at the right price, and that your family will have the income replacement they need if something happens to you.

There is no charge to you for our services—we are here solely to match you to the right policy for your needs. You only pay for the policy after you’ve been approved for coverage and are 100% satisfied. Call us today at 855-247-9555, or click the button below to get a free life insurance quote online.

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Justin Nelson

Managing Partner at JRC Insurance Group
Justin is a co-founder, managing partner, and a licensed life insurance agent at JRC. He began working in the insurance industry after graduating from SDSU in 2004, and he takes pride in helping his clients find the most affordable coverage available. Justin is an avid sports fan that enjoys barbecuing, fishing, golfing, and spending time with family and friends.
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