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Ask the Life Insurance Expert

How much life insurance do I need?

Get ready to do some homework, because that's what it will take to find an answer. Some people offer pat formulas for how much life insurance to buy, such as multiplying your annual income by seven. But a simple calculation isn't enough to arrive at a good figure.

Take stock of your finances and think about how loved ones who depend on you would maintain their lifestyles if you died prematurely. Think about inflation and future expenses, such as college education costs if you have kids.

A good approach is to add up all the short-term financial needs that might arise if you died. These include paying off:

  • Outstanding debts.
  • Emergency expenses and final expenses, such as medical and funeral costs.
  • Attorney and executor fees and probate court costs.
  • Any outstanding taxes that would have to be paid.

Next, look at your long-term financial obligations, such as college tuition for your kids and the mortgage. Then, consider annual expenses to maintain your family, such as child care, food, clothing, utility bills and transportation. Multiply the figure by the number of years you want to provide that income.

Once you've added up all your short-term, annual and long-term expenses, do an inventory of your financial resources, such as savings accounts, stocks, bonds and death benefits from other life insurance policies. Subtract your resources from the amount of money needed to meet your family's financial needs. The total represents how much life insurance to buy.

Talk to a trusted financial adviser to help you plan and select the right kind and amount of life insurance for your circumstances. For more, see How much life insurance do you need?

Last updated: Nov. 21, 2011