Basically, you want to determine your yearly household expenses, your assets, your income from all sources, and what debts you have. Most people who are looking for life insurance ask a financial professional to help then, like an accountant, an investment counselor or a life insurance broker. Be careful that the person you choose is objective and won’t try to sell you more insurance than you need. Figuring out how much insurance you require is more important than the type of policy you purchase, so put some time and effort into this part of your search.

Calculating How Much You Need

If you want to figure it out for yourself before you see a professional, it will take some work on your part. Gather the information you need and calculate the following:

a) Annual income needed

This is the amount your dependents will need to keep their standard of living where they would like it to be. This should include enough to cover your rent or mortgage, home maintenance and repairs, home improvements, household items, and real estate taxes and insurance. It should also include health and auto insurance, utilities, clothing, food, transportation and auto maintenance costs, plus child and dependent care, recreation and entertainment, and any other expenses they might have.

b) Income your dependents will have when you are gone

This would include your spouse’s salary if working outside the home, social security benefits (easily obtained from the Social Security Administration), and investment income from all of the accounts you currently have. Do not include the insurance proceeds as income here.

c) The difference between what your dependents need and what they will have

Deduct a) from b) and you will have determined how much more they will need to live comfortably.

• Preferred – You are a low risk. You are not sick; don’t have a high-risk job or hobby; have a clean bill of health. You pay a lower premium.
  
  
• Standard – You are an average risk. You may have had some health issues in the past, but don’t have a terminal illness or a high-risk job or hobby. You pay an average premium for similarly situated insureds.
  
  
• Substandard – You have a high-risk job, such as a pilot, scaffold worker or diver; or you have a chronic illness like diabetes, heart disease or high blood pressure. You pay a higher premium.
  
  
• Uninsurable – You have a terminal illness. You will not likely find an insurer to sell you a policy. You are a high risk.