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Items that Help Establish the Accurate Amount of Life Insurance

The next big question is how much insurance coverage to obtain. You should first evaluate your own 'financial big picture' and then seek advice from an agent or someone who can use industry software to calculate risks. Insurance firms use software that incorporates formulas and statistics to accurately determine how much people with certain financial and lifestyle situations will end up needing long-term.

Life insurance coverage is best determined using the factors listed below. An accurate amount of coverage will greatly benefit the policy holder in terms of cost and what is covered. Some of the items you should be looking at are:

• Your total after-tax income, including any rental, alimony, or subsidy income
• Your life expectancy (www.livingto100.com has a 'life clock')
• Your debts (credit cards, mortgages and other debts should be assessed)
• The earnings potential for your lifetime
• If you want your beneficiaries to have grieving time or to compensate living allowances in addition to hard costs.
• Assets, estate taxes and other insurance programs
• Any inheritance you may be eligible for or are willed
• Health situation of yourself, family members and anyone else who would be a beneficiary; especially members with special needs

Everyone's needs are different depending on their own unique financial situation. The LIMRA reported that as of 2005, 47% of widows/spouses claimed inadequate insurance compensation. Some financial planners state that 7-10 times the amount of your annual salary after taxes should be guidance for income replacement. However, you should have a consultant investigate your other variables before sticking with a number; an average percentage may not work for your needs.

The case may be that you need little to no life insurance. If you are single, have little or no debt, and no dependents, you might not require life insurance at this point. However, if your situation changes, or if you anticipate future changes, you can get a minimum coverage policy or one that will cover your specific needs.

Let's walk through some basic steps to determine a rough estimation of insurance needs. In this scenario, a family with one working parent, and one child, making $65,000 annually wants to choose a policy.

First, living expenses must be determined. This is an amount that your family or dependents would need to maintain their current lifestyle. You can make adjustments accordingly for costs that relate specifically to you; if you incur costs that would not exist in your absence, you can delete these from your calculation.

Get a good idea of what funeral expenses would be, and where you would like the service to occur. Check the local market pricing to see what an average cost might be so you can calculate this cost. Costs could range from $5,000-$20,000 for a moderate funeral.

Would any beneficiaries or family members be reimbursed for management of your estate? What about attorney's expenses or administration costs? Be sure to consider these. Also, any living allowances that you would like to provide should be included.

Next, look at other miscellaneous expenses such as college tuition, emergency and medical care, and any loan pay-offs that weren't included before.

Another area that is often overlooked is social security compensation that may be provided to your widow/er. You can get an estimate of what this payment might be by calling the social security office. Any other types of future earnings should be included in this overview.

By following the given formula above, this person's life insurance needs would approximate $3.2M. This seems like a large number, but keep in mind that this amount would need to last the lifetime that you would have been expected to live.

This amount is a rough estimate, and could vary in dollar amount. The next step is to determine the type of coverage you would want for this amount. If $3.2M is an accurate life insurance rate for this family, how will they choose to pay for the premiums?