Term life insurance is an insurance policy that covers you for a specific length of time, and will provide a benefit payout to your beneficiaries in the event of your death during that time. These policies are popular among young, healthy people who are the sole or substantial income providers for their families. In order to calculate how much insurance you should buy, you should keep in mind the purpose for the insurance.

Most people purchase this type of insurance in order to ensure that their family will remain financially solvent in the event of their loss. Typical expenses that people want to cover for their families include the estimated $8,000 to $10,000 in burial and funeral costs, the loss of income from their wages, loss of health care coverage from their employer, and significant one-time expenses they would have paid, such as college tuition for dependent children.

When considering the loss of wages from their families’ income, term life insurance buyers should keep in mind how long they will need to cover expenses. Is it until a spouse can be re-trained and qualified for a new position? Or until children are grown and out of the house? Until a house can be sold, or investments liquidated?

To calculate the amount of benefits you would need to have the insurance company pay out, calculate your net wages over the entire period of time your family would still be dependent upon your income. That’s net wages, not gross wages; the insurance benefit will be paid out tax-free to your beneficiaries, according to current US law. (Of course, do check with a qualified CPA or tax attorney to review your specific tax situation before making financial decisions.). You also have the option of going to an insurance office or company for advice.

Be sure to use a financial calculator that allows you to also include the cost of inflation over the period of time your income would need to be replaced. Also factor inflation and rising education costs into the cost of tuition and related fees. You will want to get life insurance quotes from several companies to insure you are getting a good deal.

For example, assume that you have one spouse and one child, age twelve, for whom will need to pay a total of $24,000 in college tuition within the next 10 years. Your spouse’s income would be sufficient for them to support themselves once your child has gone off to college, six years from now. Your funeral expenses would cost about $10,000. Your after-tax annual income is currently $48,000. You would also like to pay off a car loan and credit card debt totaling $12,000, so that your spouse would not need to worry about these expenses. In summary, that’s $48,000 per year for six years, plus compounded inflation, plus the future value of the college tuition, and the credit card and auto debt, plus the immediate funeral expenses.