To determine how much life insurance you’ll need, you should go through this comprehensive process:
1. Project major expenses. Do you expect to send your children to college? If so, how much is that likely to cost?
2. Replace your income. Although circumstances will differ, many families find a need to replace 60 percent of an individual’s gross earnings. To replace a $75,000 income, for example, $45,000 per year might be required.
3. Capitalize the shortfall. Suppose that your survivors would need $45,000 in annual income to replace your earnings. If you believe that investment returns of 5 percent are likely, multiply by 20–you’d need $900,000 of life insurance, in that case.
That’s in addition to what you’ll need for major expenses, such as college.
4. Consider current savings. Once you have tallied all the funds you’d like to leave behind after your death, you can see how much you’ve already saved. For example, if your needs total $1 million and you already have $250,000 in savings, you might want to purchase $750,000 in life insurance.