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.)

  1. Which insurance policies do I really need?

    Your needs for insurance depend on your situation and can't be generalized for everyone, but there are a lot of options available. ... Read Answer >>
Related Articles
  1. Insurance

    The Best Type Of Life Insurance For You Right Now

    Different stages of life call for different amounts of life insurance coverage. Find out what you need, when and why.
  2. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  3. Insurance

    Life Insurance: Putting A Price On Peace Of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  4. Insurance

    Term Life Insurance: Everything You Need to Know

    Term life insurance is an affordable way to financially protect your loved ones after your death. Here's what you need to know before purchasing a policy.
  5. Insurance

    Millennials Guide: Too Young for Life Insurance?

    Unless you have kids, it's easy to think you don't need life insurance Here are the reasons why you might– as well as which type and how much to get.
  6. Insurance

    Finding the Right Life Insurance

    Learn how to determine the type of life insurance you need and use our calculator to find out how much coverage you should have.
  7. Insurance

    When Life Insurance Isn't Worth It

    So, you're thinking about buying life insurance, but do you really need it?
  8. Insurance

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
  1. Life Insurance

    A protection against the loss of income that would result if ...
  2. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an ...
  3. Personal Lines Insurance

    Property and casualty insurance products for individuals that ...
  4. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  5. Death Benefit

    The amount on a life insurance policy or pension that is payable ...
  6. Insurance Industry ETF

    A sector-following fund that invests primarily in insurance companies, ...
Hot Definitions
  1. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  2. Federal Debt

    The total amount of money that the United States federal government owes to creditors. The government's creditors include ...
  3. Passive Management

    A style of management associated with mutual and exchange-traded funds (ETF) where a fund's portfolio mirrors a market index. ...
  4. Series 7

    A general securities registered representative license administered by the Financial Industry Regulatory Authority (FINRA) ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Expatriation Tax

    An expatriation tax is a tax on someone who renounces their citizenship. In the United States, the expatriation tax provisions ...
Trading Center