When asking yourself "how much life insurance do I need," it is important to remember that there is no right or wrong amount. There is also no foolproof formula to help you figure the amount that you need. Many sources tell insurance buyers to purchase a plan equal to five times the person's salary. This is not always the best answer. The amount of insurance a buyer should purchase varies from person to person, depending on the specifics of your financial situation.

Instead of using a formula, it is best to think about your family's needs. You should analyze your family's finances, and decide how much money they would need to live if you were gone. Be sure to consider your family's goals in addition to their immediate needs.

Consider Your Expenses

The first step in deciding how much life insurance to purchase is estimating your family's needs. How much money does your family spend each month? You must make sure that your family will receive enough money per month to meet their needs.

In addition to monthly spending, consider the debts you would be leaving behind. You must leave your family enough money to cover funeral expenses, and to aid in paying the remaining mortgage on your house. Also consider car payments and other debts.

You will probably want to incorporate your children's college expenses into your life insurance plan. Start by estimating your children's college expenses. Be sure to consider inflation, and don't forget to revise the plan periodically as your children get closer to college age.

Supplementing Your Income

Before purchasing a life insurance plan, you must decide how much insurance you will need in order to supplement the income that will continue after your death. Consider your other sources of income- social security, savings, investments, retirement, benefits, and spouse salary. Compare the sum of these sources to your current income. If your current income is larger than the sum of these sources, you will need to compare your continuing income to your family's estimated cash requirements. The amount be which their cash requirements exceed your continuing income drives the minimum requirement for life insurance.

Suppose, for example, that you have a $1,500 monthly shortfall. Your life insurance proceeds will have to be invested in a manner that generates $1,500 per month of income. If you check around and determine that a $100,000 policy will generate $400 per month of income, then you probably need a $400,000 policy to allow your family to live comfortably.

If certain of your cash requirements, such as college education for your children, will not be long-term expenses, then you should estimate those expenses separately. You can estimate the total cost of those expenses and purchase a lump-sum amount of insurance to cover the need.

Think about immediate costs, future costs, and monthly income needs in comparison to money from other sources. The amount other sources will not cover is the amount of life insurance you need.

Other Considerations

In some instances, Estate Taxes must be paid in cash while the assets of your estate are tied up in real estate or a family business. Life insurance can help meet this cash need in the event of your death. In order to have a realistic picture of your cash needs, analyze which of your assets should be sold and which of your assets need maintaining for future growth.

Life Insurance also increases the assets of beneficiaries.

• Ask Yourself: "Is your spouse's income alone enough?" "Do other resources cover the expenses?" "Do I even need life insurance?"
  
  
• Don't forget about inflation. Review your life insurance analysis yearly.
  
  
• Many companies will enter your financial information into a computer in order to calculate the amount of life insurance you should purchase. This can be helpful, but it does not take your individual situation into account. Use the calculations as a reference, but consider your individual financial situation before purchasing a plan.

Other Resources:

http://moneycentral.msn.com/investor/calcs/n_life/main.asp

http://www.life-line.org/life/ins_needs.html

http://www.bygpub.com/finance/LifeInsCalc.htm

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