Everyone knows how important life insurance is. Everyone should buy insurance so that their families and dependents are not left in the lurch in case anything happens to them, if they die or if they become handicapped and unable to earn or something like that.

But how much insurance should you buy? That is a million dollar question. Financial advisers say that you should multiply your annual income by seven. Others advise that you should buy insurance which is enough to replace the income which he is expected to make between the time of buying the insurance and retirement. Others recommend the buying of adequate insurance which will cover the present debts.

All this can be achieved with the use of a calculator but it is not enough. You have to do a lot of homework before you reach the right answer. You have to consider inflation, study the financial world, take an inventory of your finances, think how much your dependents will need if you are no longer there or cannot earn. Also the expenses incurred in sending children to college have to be considered and taken into account.

While trying to find out how much insurance you need to buy, you should not forget to take into consideration your individual needs and obligations. Car loans, house mortgage, student loans are things which should also be considered. Then there are future debts or expenses due to unforeseen circumstances which also need to be thought of before a final decision is made to buy insurance. Every three years a review has to be done or whenever there is a major change in your life for instance if there is a new baby or if you have bought a new house or growing children need college education and so on and so forth.

A simple basic mathematical formula to calculate how much insurance you needs is: short term needs+ long term needs –resources=how much life insurance you need. This can be done using some simple steps and calculations. You have to first add up all the short term needs which are final expenses, outstanding debts and emergency expenses. The final expenses are the medical and hospitalization bills, funeral expenses, lawyer’s fees, any outstanding taxes and others. Outstanding debts are like the credit card balances, auto loans, and college loans while emergency expenses include a cash reserve for medical emergencies, repairs to home or automobile.

These should be added to the long term debts like mortgage loans and college fees. Calculating education costs is tricky but on an average you should add five percent a year to the present expenses. Generally this comes up to $5000 per annum or $20,000 for a private four year course in the US. The family maintenance costs include childcare, food, clothing, utility, entertainment, travel, transportation etc. The total of one year’s expenses should be multiplied by the umber of years that the insurer wants to provide income to the family. You should add all this- the short and long term debts and the family maintenance amount.

The next step is to figure out the resources, savings, stocks, bonds, mutual funds, social security etc. Subtract the resources for the total expenses and the figure that is reached will represent the amount of life insurance you should buy.