The primary reason for buying life insurance is to protect your dependent loved ones against the loss of your income or services. Not everybody needs life insurance. If you are a young single with no children or a mature single whose children are grown, you may not need life insurance at all. The best way to calculate the amount of insurance you need is to take the following three steps:
Calculate the financial need – List the expenses that will have to be covered by your loved ones once you die. Consider the one time expenses that occur immediately before and after a death. These typically include funeral and burial costs as well as the cost to settle the estate. Then look at income replacement needs. The major financial cost of your premature death is the loss of your income. How many years did you plan to support your loved ones? How much will expenses decrease because you are no longer there? You may also want to allow for readjustment expenses to help your family adjust to your death, repayment of debt, and college expenses. If you have other special needs that are not common to most families, such as a disabled child, you will want to consider these needs in your calculation
Calculate the resources available to meet those needs – If you have substantial savings or other assets, you may choose to plan on using these resources to cover part of the financial need. Government benefits such as Social Security survivor's benefits may be available. Subtract these resources from the financial need calculated above to determine how much life insurance you should purchase.
Buy insurance to cover the difference – Now that you've identified the financial need that will exist on your death and the resources available, you can close the gap between the two with life insurance. Shop around and compare prices and coverages carefully. There are two basic forms of life insurance: term insurance and cash-value insurance. Term insurance pays only death benefits and only pays them if you die while the policy is in force. Cash -value insurance also incorporates an investment element. Remember to compare the policies that you are looking at closely and ask questions until you are sure you know what you are buying. As a general rule, it is most cost effective to meet your life insurance needs with term insurance and make your investments through another mechanism.
It's important to review your need for life insurance periodically as your circumstances change. Having another child or buying a new home could trigger a need to buy more life insurance. As your children become self-sufficient and your savings and investments grow, you will need less insurance. If you have no dependents and nobody that will have to hire someone to do the things that you do now, you probably do not need to have life insurance.