When you’re trying to decide how much term life insurance to buy, there are generally two methods to use. Each person’s situation is different, so no two people are likely to come up with the same answer. The paths to take, however, are limited. Quite simply, you can calculate or you can estimate.

Calculate

There are several tools you can use to help you calculate how much life insurance you need. Based on your income, spouse’s income, assets, number of children you have and the ages they are at the time of your death, your needs will be larger or smaller. Use a life insurance calculator or worksheet to help you decide how much coverage is right for you.

When entering information, you’ll need to be aware of several terms and be ready to estimate certain expenses.

  • Final expenses: This figure includes medical expenses, funeral costs, and other bills to be settled upon your death, but does not include your mortgage.
  • College funding: Consider how many children you have, and what the cost of education is likely to be when they’re ready for college. Estimate higher costs for your younger children and lower amounts for older kids, since college costs have been steadily rising in recent years and there are no indications that trend will reverse any time soon
  • Savings and investments: Consider your personal savings account, as well as investments that will mature or be available upon your death. You can also factor in CDs and bonds that pay out much later, but remember they won’t cover immediate expenses, such as burial costs.
  • Annual income requirements: It’s not easy to figure out what the cost of living will be sometime off in the future, and it’s hard to know for sure if your family can sustain their lifestyle if you’re out of the picture. You can typically estimate this cost at about 60% – 75% of your family’s current income.

Estimate

If you don’t want to take the time to calculate your life insurance needs, or you don’t have access to all the information you’ll need right now, no problem. You can estimate how much insurance you should get. Simply multiply the current household income by five. If you have more than two kids, multiply by eight. That will give you a rough idea how much coverage you should buy.

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