# How to Calculate How Much Life Insurance You Need

Before purchasing life insurance, it helps to calculate how much money your family will need if you die unexpectedly. By estimating the amount of life insurance you'll need, you can help make sure that you don't purchase too little or too much. Follow these steps to calculate your life insurance needs and find the best policy for you.

## 1. Calculate Your Immediate Obligations

The first step to calculating your life insurance policy needs is to add together all of the expenses that will need to be paid immediately after your death. This can include everything from funeral expenses to estate taxes to student loans.

Example: John is calculating his life insurance needs and adds together his medical bills, estimated funeral costs and remaining mortgage payments and student loan balance. He owes \$6,000 in medical bills, estimates his funeral will cost \$8,500 (based on the average cost of funerals in 2016), he owes \$120,000 on his mortgage and has an outstanding balance of \$30,000 in student loans.

\$6,000 + \$8,500 + \$120,000 + \$30,000 = \$164,500

## 2. Calculate How Much Money Your Family Will Need

Next, you'll need to calculate how much money your family will need to keep living the way they are even after your death. You don't want them to have to make any major lifestyle changes while grieving, so this step is pretty important. You can do this by adding your total annual income (including your Social Security income) multiplied by how many years you'll need to provide it.

Add to this number your current savings and investments (not including retirement funds), plus your current retirement savings, plus the value of any current life insurance policies (such as a work policy). If you'll be paying for your kids to go to college, you'll also want to add enough money to cover each child's tuition.

Example: John makes \$80,000 a year and estimates he will need to provide for his family for a total of 12 years (until his kids go to college). His current savings and investments total \$25,000 and his retirement fund is at \$10,000. He has a term life insurance policy provided by his work that pays out \$100,000 in the event of his death. He has two kids, ages 6 and 8, and he plans for each of them to attend a public university for around \$25,000 a year (based on the average yearly cost of attending a public university in 2016).

(\$80,000 x 12) - \$25,000 - \$10,000 - \$100,000 + (\$25,000 x 8) = \$1,025,000

## 3. Consider Your Spouse's Income

If your spouse is going to work after your death, you can subtract his or her income from the total amount of life insurance you think you'll need. Don't forget to subtract estimated yearly income tax from their yearly salary.

Example: John's wife makes \$65,000 a year. She is 36 and expects to work until she is 65 (29 years).

(\$65,000  - 15%) x 29 = \$1,602,250

## 4. Total Coverage Estimate

Example:

\$164,500 + \$1,025,000 - \$1,602,250 = \$741,750

Alternate Methods of Calculating Life Insurance

The guide above is one of the more in-depth ways to calculate your life insurance needs, but there are other methods. Here are a few other ways to estimate how much life insurance coverage you'll need:

• Multiply your income by 10
A simple way to estimate your life insurance needs is to multiply your income by 10. This method is a little outdated and doesn't take into consideration your family's needs or your savings, but can help you get a simple estimate in a hurry.

Example: Tiffany makes \$100,000 a year. \$100,000 x 10 = \$1,000,000. Tiffany will need a life insurance policy worth \$1,000,000.

• Your income times 10 plus college expenses
Another quick way to calculate your insurance needs is to multiply your income by then then add \$100,00 per child for college expenses.

Example: Tiffany makes \$100,000 a year. \$100,000 x 10 = \$1,000,000. Tiffany has three children. \$100,00 x 3 = \$300,000. Tiffany will need a life insurance policy worth \$1,300,000.