BOSTON. Let me give you the good news first. We're not better off dead than alive. Neither are those we love.

I learned this while spending the better part of a week with Professor Laurence J. Kotlikoff, Chairman of the economics department at Boston University. In addition to working on a new book with him, I was learning how to use a very interesting piece of software that tells us, in no uncertain terms, that most families are underinsured. As a consequence, millions of families are in peril of seeing their standard of living decline by 20 to 40 percent if a primary earner dies prematurely.

Yes, you've figured it out. The topic is life insurance. But now that I'm sitting at your kitchen table, let me have a few minutes of your time.

Many people have no life insurance.   Few have enough. We don't have enough as measured by the calculators and models commonly used by the life insurance industry. We certainly don't have enough when measured by the method advocated by Professor Kotlikoff.

In a variety of research projects with other highly respected economists--- Alan J. Auerbach at Berkeley, B. Douglas Bernheim at Stanford, and Jagadeesh Gokhale at the Cato Institute---Professor Kotlikoff came to these conclusions:

•  That virtually all households are underinsured,

•  That very few are over insured,

•  That the most likely underinsured are households with younger spouses, ages 22-39 years old,

•  That lack of adequate insurance accounts for most of the poverty among widows and widowers and,

•  That there was almost no relationship between the amount of insurance people had and the amount they needed.

It's important to note that the researchers are academics. They aren't life insurance sales reps. They aren't putting a miniature coffin in front of you asking, God forbid, that you imagine dying today or tomorrow. If these researchers conclude we're massively underinsured, it's economics. It's not marketing.

So how much life insurance should we have?

We can start by finding the ballpark. The purpose of life insurance is to protect those we love from the premature loss of our earning power. That means you can get an outside measure by estimating how much your survivors would need in assets to have the same standard of living without you. Try something in the area of 20 to 25 years of your income.

Most life insurance sales presentations are based on three traditional methods: rule of thumb, life insurance needs calculators, and human life value calculators. The common attribute of all three methods is that they often underestimate the amount of life insurance needed compared to the method preferred by economists. So even if you dutifully buy the amount of life insurance suggested by the sales rep in your kitchen, it probably won't be enough. If you did buy enough, buying term life insurance rather than cash value life insurance---such as whole life or universal life--- would be a necessity simply due to premium costs.

The estimating method preferred by economists is called "consumption smoothing." It is based on the life cycle hypothesis, an idea for which the late Franco Modigliani won a Nobel prize in economics in 1985. The idea is simple: that human beings try to smooth their consumption over their lifetimes and avoid "disruptions." For economists, as well as normal human beings, death qualifies as a major disruption.

The major difference between the consumption smoothing method and what Professor Kotlikoff calls "targeting" methods, is that the smoothing method incorporates the impact of life events when dealing with your lifetime standard of living. The need for life insurance, for instance, doesn't increase very much when a family decides to have a third child. Why? Adding the third child (like the two before!) reduces the parents' adult personal consumption and lowers their lifetime standard. Similarly, life insurance needs don't increase as much as expected when a secondary earner becomes a stay-at-home parent because the loss of secondary income reduces the standard of living that needs to be protected.

Calculations of actual insurance needs--- among other things--- can be done using Economic Security Planner, consumption smoothing based software developed by Professor Kotlikoff and Dr. Gokhale. This is the first personal finance software that uses dynamic programming, a major (if complicated) advance over earlier financial planning software.

On the web:

TIAA-CREF life insurance paper, "The Adequacy of Life Insurance"

Economic $ecurity Planner Software