Determining how much life insurance an individual or family needs can be a tricky problem. Life insurance needs are sometimes dependent on the insured person’s age, their monetary situation, the age and health of their dependents, and their own health. Because of the high number of factors that determine the amount of insurance that someone should purchase there is no one equation that can be used to determine the exact amount of insurance that should be purchased. There are several guidelines to follow, however.

The most common guideline is to buy at least twenty times the annual salary of the person being insured. This is the general rule for anyone with minor, dependent children. By purchasing this amount of insurance, survivors of the insured can create a trust which will pay an amount equivalent to the deceased’s annual salary by withdrawing 4% of the total amount in the trust once a year. Of course, the money will need to be invested conservatively in order to last indefinitely.

The problem with this method of accounting is that people with high incomes will need to purchase very large amounts of life insurance. If an individual does not need to provide for his or her dependents indefinitely, there are other ways to calculate a life insurance need. Another common method is to calculate the expenses of the dependents until they are able to support themselves. Typically this is done by using current amounts for living expenses and life expenses such as tuition and health care, then applying a conservative estimate of inflation.

This method is good for determining the amount of life insurance needed for a family with older dependent children. Since most of the estimates used will usually only hold true for a few years, this is not a method recommended for people with young children. The first method to provide perpetual income is recommended for young families.

Individuals who do not need to support minor children will need to calculate their life insurance needs differently. Start by determining who needs to receive a life insurance benefit from the insured. For example, in the case of a married couple with grown children or no children, life insurance may only need to cover the expenses of the surviving spouse. A couple with a disabled child, however, may want to leave enough to care for that child throughout his or her entire life. Once personal needs are determined, individuals will be on their own to determine the exact amount of life insurance they need.