Rule of Thumb
One widely followed rule of thumb for estimating a person’s insurance needs is based on income. Some will say a person needs a life insurance policy that is five times his or her annual income. Others recommend up to ten times annual income.
But if you are looking for a more accurate estimate, consider completing a “DNA test.” A DNA test is a Detailed Needs Analysis that takes into account a wide range of financial commitments to help better estimate insurance needs.
The first step is to add up needs and obligations.
Which funds will need to be available for final expenses, such as a funeral, final medical bills, and any outstanding debts, such as credit cards or personal loans? How much to make available for short-term needs will depend on your individual situation.
How much will it cost to maintain your family’s standard of living? How much is spent on necessities like housing, food, and clothing? Also, consider factoring in expenses such as travel and entertainment. Answering the question, “What would it cost per year to maintain this lifestyle?” is good place to start.
What additional expenses may arise in the future? What family consideration will need to be addressed, especially if there are young children? Will aging parents need some kind of support? How about college costs? Factoring in potential new obligations allows for a more accurate picture of ongoing financial needs.
Next, subtract all current assets available.