This method considers future expenses in addition to future earnings. LIFE stands for Liabilities, Income, Final Expenses, and Education – four significant factors to consider when making a detailed estimate of your life insurance needs:
Liabilities: Total all your debts: mortgage, car loans, credit cards, student loans – even personal obligations such as money you may have borrowed from a sibling to put a down payment on your house.
Income: How much do you make a year? And how many years will your family need that money? It’s a tricky question to answer, but a good place to start is determining how many years until your youngest child graduates from college. For example, if you make $60,000 and have ten years until your youngest graduates from college, put down $600,000 for income replacement.
Final Expenses: How much do you expect your family to pay for funeral costs?
Education: Calculate anticipated college costs for each of your children. How much should you add for each child? College education costs vary between public versus private, and in-state versus out-of-state: a general rule of thumb is somewhere between $100,000 and $200,000 per child. If you take the average – and have two kids – that’s an extra $300,000.
Add those four factors all up and that’s your life insurance need amount. You can also adjust that number for any current savings and life insurance you already have and consider effects of inflation over time (see below for an infographic on effect of inflation for more details).