The Radical Guide to Life Insurance: How much life insurance do you need?

The best way to approach this question is to consider a number of things. But do keep in mind, that you might want to consult an advisor on this question because there are a host of estate planning and tax issues that could affect your decision-making.

The age factor. Assuming you need life insurance, you should assume that the younger you are the more life insurance you need. Why? For if you were to die an untimely death, you want the insurance company to replace the income you would have earned over your lifetime. If you have a young child, you want to know that the child will be able to afford food, clothing, housing, and education until she has the means to support herself.

If you are relatively older, you probably need less coverage than you would have at a younger age, for chances are your beneficiaries now have the means to support themselves -- unless, of course, you have been blessed with young children in your old age. In that instance, more coverage can be important.

Calculation method. In order to calculate the amount of coverage you require, simply take the number of more years you anticipate working (assume retirement age of 65) and multiply that by the amount of your annual pre-tax income. You might also want to make a list of all of your present and future financial needs and those of your family and see how that compares with the calculation above.

If you are a homemaker. Important: Even if you don't have a paying job, your economic value to the family might be substantial. If you are a stay-at-home mother you are likely responsible for child-care, cleaning, laundry, food preparation etc. Replacing these responsibilities is a tremendous task and one that will probably require the hiring of a paid provider. So when calculating how much insurance you need, consider the costs associated with replacing yourself in your household.

Items that could lower your insurance premiums. Keep in mind that while you would like to maximize your death benefit, you don't want to be saddled with exceptionally high premium payments. Therefore, make sure to account for other sources of income that could reduce your beneficiaries' future income needs. These items might include your spouse's income, monies you have saved, and social security payments that you are likely to receive (assuming that there are any social security monies to speak of!). You can estimate your social security benefit by using one of the government’s online calculators. These factors might help reduce your coverage needs and in turn reduce your premium payments.

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