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. ### Private Placement

The sale of securities to a relatively small number of select investors as a way of raising capital.
2. ### AAA

The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
3. ### Backward Integration

A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
4. ### Pari-passu

A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
5. ### Interest Rate Swap

An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
6. ### Custodian

A financial institution that holds customers' securities for safekeeping so as to minimize the risk of their theft or loss. ...