How to Calculate Life Insurance Coverage
Calculating how much life insurance you need can be somewhat subjective for many people. Life insurance agents often have several different ways to estimate the amount of life insurance an individual should buy. Sometimes these estimates include "rules of thumb" or are imprecise, erring on the side of too much insurance rather than too little. However, when you understand the basic purpose of life insurance-to provide money for your financial obligations if you die before those obligations are met-calculating life insurance needs can be done by practically anybody.
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Instructions
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Gather all of your debts, including mortgage, medical, loans and credit card bills.
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Add up all of your debts. Make sure you add up the monthly payment amount as well as the total debt amount.
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Calculate other debts that may not be self-evident. For example, if you have young children, it is your responsibility to take care of them. Approximate the cost of everything from food and clothing to education from their current age to the age of majority (18 in most states). Then, decide if you want to provide additional money for college or some other expenses they might incur.
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Add up any miscellaneous or optional financial debts you want to assume. This would include future payments to your spouse, or to a charity. While spousal payments are often included in the "necessary" calculation of life insurance coverage by insurance agents, your spouse may not need extra income after you die. You must decide if this is optional or not.
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Add up the total amount of all of your financial obligations and factor in inflation. Inflation can be somewhat unpredictable, and you will need to decide whether you want to adjust your total financial obligations upward by 3 percent, 4 percent, 5 percent or some other inflationary figure. If you are purchasing whole life insurance, or some other life insurance where the death benefit is tied to interest rates or pays dividends, you may not need to adjust upwards for inflation as the policy's death benefit will automatically adjust upwards due to the design of the policy. The total amount of your financial obligations (adjusted for inflation, if necessary), represents the total amount of life insurance you need to cover all of your financial obligations.
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