Seven Ways to Calculate the Amount of Term Life Insurance You Need

Several methods exist for calculating the right amount of life insurance for your situation. How much insurance you purchase depends largely on your reasons for buying insurance in the first place. Consider these seven methods when you are trying to decide how much life insurance you need.

Salary-Based Plans

A standard way to calculate life insurance needs is to multiply your regular salary by the number of years you would like to cover for your dependents. The 17-year plan would mean that you purchase insurance that equals 17 years of your current salary, which should provide 17 years of financial stability after your death.

Age-Based Sliding Scale

Some financial experts recommend that you purchase enough insurance to cover your remaining years before retirement. If you are 3 years from retirement, you should purchase enough insurance to cover 3 years after your death. On this type of scale, younger individuals will purchase higher amounts of insurance than older individuals because they will need to compensate for more working years. You could also use your age as a point of reference. Instead of buying enough insurance to cover you until retirement, buy enough to cover you until you reach a specific age that fits into your financial plans.

Human Life Value

The human life value calculation is similar to a salary multiplier, but it takes into account all of the other economic factors that can increase or decrease your value to your dependents. You calculate your insurance amount based on your salary expectations for a certain number of years. Then you factor in your work benefits and non-income based contributions to the family, such as childcare on your days off. Remember to factor in a 3 percent decrease based on your odds of becoming unemployed, and an 8 percent decrease based on the amount of your income that you expect to spend on yourself. In addition, you calculations should be based on your income after taxes, since the family never benefits from that income.

Needs-Based Calculations

In a needs-based calculation, you think of the things you would like to make sure are covered if you were to die. Most people are concerned with paying off mortgages or making sure their children have enough money to go to college. You add up those long-term financial goals and factor in an amount that you believe would keep your family comfortable financially, and purchase that amount of life insurance. Needs-based calculations are usually less than human life value or salary-based calculations, but they generally provide what you want to leave to your dependents.

Particular Financial Goals

In some cases, people buy life insurance to cover specific financial burdens. For example, if a married couple purchases a home together, it is a good idea for each of the spouses to take out a life insurance policy in the full amount of the mortgage. That way the mortgage is paid even if one spouse should die before the house is paid for. If you know you have a specific debt that you have cosigned with someone else, it makes sense to purchase a life insurance policy in the amount of that particular debt.

Buy Only What You Really Need

No matter how much life insurance you would like to purchase, the payments need to stay within your current budget comfortably. It does not make financial sense to buy more life insurance than you can pay for. You will end up causing yourself and your dependents financial hardship because you are working so hard to make sure everyone is financially stable after your death. If you buy too much insurance, it is possible that you could put your family into a deep economic hole that would be difficult to climb out of, even with a life insurance payout.

Something Is Better than Nothing

If you can’t afford to buy as much insurance as your calculations recommend that you should, just buy what you can afford. Even purchasing half as much life insurance as you might really need will provide some financial comfort to your dependents upon your death. Choosing not to buy insurance because you feel that you can’t buy enough will only ensure that there is nothing for your dependents to fall back on if you were to die suddenly. Any amount of life insurance coverage can help ease the burden of losing your financial contribution.