A:

The main purpose of life insurance is to provide the same standard of living for your family and cover your financial responsibilities in the event of your death.

The two most common methods for determining insurance needs are the following:

  1. Rule of Thumb Method - Most commonly used, and easy to calculate. Simply calculate your annual income and multiply this figure by five- to 10-times your annual income. It's a quick method, but not the most precise nor situation-specific.
  2. Actual Needs Method - Here you'll need to compute all of your debts, expenses and inflows in a similar budget and balance sheet format. Once you've done this, you'll want to make sure that you obtain enough insurance to payoff all of the debts (current and future-college for the kids), next you'll want to add a yearly expense cushion (maybe cover five- to 10-years of expenses). When you have these figures, add them together and this is how much insurance you should obtain.

  3. Standard of Living Method - Determine the amount of money the survivors would need to maintain their standard of living if the insured person died. Multiply that amount by 20. The thought process here is that the survivors can take a 5% withdrawal from the death benefit each year (which is equivalent to the standard of living amount) where at the same time the survivors should be able to invest the death benefit principal and earn 5% or better.

    (For more, see What To Expect When Applying For Life Insurance.)

(This question was answered by Steven Merkel.)

Hot Definitions
  1. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  2. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  3. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  4. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  5. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center