How do I calculate my needs analysis for term life insurance?

Here are a few simple steps to caculate your needs for term life insurance:

1. Add up your short-term needs.
You can think of them in three categories: final expenses; outstanding debts, and emergency expenses. Don’t forget to include credit card balances, auto loans college loans, and any other outstanding bills. Emergency expenses should include a cash reserve for medical emergencies and home or auto repairs.

2. Add up your long-term debts.
This will include your mortgage and college tuition if you have children. Your mortgage is easy, just use the balance. Calculating the education fund can be a bit tricky since you have no idea where your children will be attending college. One method may be to use the present average college cost in the US and the number of years that your children are from entering college. The average college costs for the 2002-2003 school year 18,273 for a 4 year private institution, which was a 5.8% increase from the previous year, and 4,081 for a four year public institution, which is up 9.6% from the previous year, according to The College Board.

3. Calculate your family expenses.
This will include necessities such as childcare, clothing, food, utility bills, entertainment, travel and transportation. Calculate this figure based on one year’s worth of expenses, and then multiply that times the number of years that you want to provide this income.

At this point, add your short-term and long-term debts and your family maintenance expenses.

4. Add up your resources.
Now that you have determined what your income needs are, figure out what resources you have to meet those needs. In order to do this, you must add up all available savings, stocks, bonds, mutual funds, existing life insurance (don’t forget employer group plans) and Social Security. You can find out how much you will get by visiting the Social Security Administration’s Web Site.

5. The calculation.
Finally, subtract your resources from your total expenses. This figure will represent the amount of life insurance coverage you should consider.