How much term life insurance should I purchase?

The answer to that question is crucial for providing adequate financial support for your family. This is why you need to carefully estimate the amount of term life insurance which will be enough to help your family meet the financial obligations and expenses in the event of your death.

There are several approaches that can help you determine how much term life insurance you need.

The Multiple-Of-Income Method

This traditional formula roughly estimates one's life insurance need at between six and ten times one's annual income.

If, for example, John receives an annual salary of $30,000, he should be looking for a policy of a maximum of $300,000. This approach is too simple, as it does not take into consideration factors such as life changes and taxes.

The Human Life Value Approach

Using the present income of the insured, this step-by-step procedure aims to calculate their future earnings in order to estimate each individual's earning potential. The method is also called "income replacement approach", as the main (and only) factor it considers, is one's income.

However, this method does not take into account other needs that a family might have.

The Needs Approach

This method is centered on estimating the amount of money necessary to cover all family needs in the event of the breadwinner's death. These needs can be as follows:

• Cash needs - these are the immediate expenses, such as funeral, tax and administrative fees;
• Income needs - the money your family will need to replace your income in the event of your death, especially in the readjustment and dependency period;
• Special needs - depending on the family's particular situation, these can include the need to pay off a mortgage, to pay for the children's education or to use in case of emergency.

In order to arrive at the amount of life insurance you need, deduct the total amount needed from your assets.

It is essential to review your term life policy every year, and at every life-changing event. You might find, for example, that your life insurance needs have increased, or that you can lower your premiums.

• Term vs. permanent life insurance – which should I choose if I am looking for long-term life insurance?
• Do I need to pay federal income tax on life insurance proceeds?
• What are they looking for in life insurance blood test?
• What are the advantages of a life insurance-funded buy-sell agreement?
• Whole life vs term life – what is the difference between term and whole life insurance?