Gerber and Co., CPAs and Financial Advisors

While life insurance can serve a variety of purposes, one of the most common is to maintain your family's standard of living in case you die. Thus, you need to purchase an appropriate amount of insurance to ensure your family is adequately protected.

While many rules of thumb exist, such as five to seven times your annual income, don't rely on these rules to determine your coverage. They don't take into account your individual circumstances, so they could leave you with an inadequate amount of insurance.

Your insurance needs will probably change over time. When you are a young, single adult, you may have little reason to purchase life insurance. As you start a family, your insurance needs will be greater, since other family members are depending on your income. As your children become independent, your insurance needs may decline. However, at that point, you may need life insurance for other purposes.

For instance, you may want life insurance to help your family fund estate taxes. The estate tax was repealed for 2010 and is scheduled to be reinstated in 2011 based on 2001 tax laws, unless further tax legislation is enacted. Business owners may want to use life insurance so the business will not be sold to pay estate taxes or to provide a means for partners to buy out the deceased partner's heirs.

The amount of life insurance you need depends on your current net worth, the lifestyle you want to provide for your family, and your personal circumstances and desires. To calculate that amount, consider these items:

Determine how much income your family needs every year, factoring in the effects of inflation.

Don't forget to include amounts to pay for college educations for your children or for any debts you want to pay off, such as your home mortgage.

Total your assets and other sources of family income. Include any benefits your family may be entitled to under pension plans and Social Security. If your spouse doesn't work now, consider whether he/she would work if you died and how much he/she could reasonably earn.

Based on how long your family needs this income, your expected rate of return on the proceeds, and other factors, you can then determine how much life insurance you need.

Since your insurance needs will change over time, assess your insurance coverage periodically, especially after major events in your life. The birth of a child or a large salary increase can drastically alter your insurance needs.