How much life insurance do I need?

Since human life is constantly subject to change, so are the individual needs for life insurance. Insuring a person's life entails financial indemnification in the case of their death. Therefore, every person shopping for life insurance has to determine the exact amount of life insurance they need. Failing to do so often results in families being left with inadequate financial support after the breadwinner's death.

There are several approaches used to estimate the individual amounts of life insurance needed.

Multiple of Income Method

Generally, it is assumed that most insureds need a life insurance policy equal to between six and ten times their annual income. However, this traditional formula is too rough and doesn't take into account certain factors, such as expected life changes, taxes and personal financial goals.

Human Life Value Approach

This method, also called „the income replacement approach", considers the economic value of human life in terms of each individual's income potential. The human life value method uses a multi-step process to measure the future expected income of the insured on the basis of the present share of their earnings. The human life value approach works well when replacing the deceased breadwinner's earnings is of main importance. However, it falls short of determining precisely how much life insurance one needs, as the only factor is takes into account is one's income.

Needs Approach

This approach helps determine the amount of money necessary to cover the major family needs in the case of the breadwinner's death. The primary family needs are the following:

• Cash needs - immediate expenses, including funeral costs, medical bills and taxes
• Income needs - include the amount of money needed during the readjustment and the dependency period, life income to the surviving spouse and retirement income
• Special needs - money needed in case of emergency, for college or to pay off a mortgage

To calculate how much life insurance you need, just subtract your financial assets, including an existing life insurance policy if applicable, from the total amount needed.

Capital Retention Approach

This is a simple method that enables you to preserve capital through personal accounting. You simply have to prepare a balance sheet with all assets and liabilities, subtract the cash needs and liabilities from the total assets and determine the amount of extra capital needed.

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