Although the insurance industry has a formula for every life circumstance, you really need to assess the amount of your annual income (before Uncle Sam takes his share) and multiply it times the number of years left until your retirement.
So figure you earn $50,000 a year and you plan to retire in 20 years, you are looking at about $1,000,000 needed for your family should you die today. However, this figure is not a true representation of their future need if you consider that your family will also be receiving Social Security benefits, an income from your spouse if not immediately, sometime in the future, and the savings you have accrued.
Keep in mind that on your death (after the tears are dried) your beneficiary will get one lump sum to pay for death benefits and to then invest the remainder so that each year, the day-to-day expenses can be met. The key here is to "invest" as this lump sum can then earn money over time for college expenses, etc. There are a number of factors to look at while you fine tune the amount you need to leave for your dependents.
If you have been working for over ten years, your dependents are entitled to a part of your social security payments you have made while employed. If your employment is less than ten years, there may still be something in the pot for them if you die today.
The Social Security Administration helps you figure out the amount for your dependents on their website, and you can use their calculator to figure out how much will be available to your family per month. Then multiply it by twelve to figure out a yearly disbursement. Then subtract that from your yearly salary and you have a significantly lower annual need for your family.
One caveat...if you are suspicious of Social Security's long term ability to pay your dependents, then you may want to ignore this figure.
Your replacement salary can also be reduced by figuring in a spouse's paycheck. Even if your spouse is not working now, and your children will have a few years before they can be left alone while your spouse works, there will come a time when that will be possible. Figure this into your ultimate replacement salary as well. Remember that you want to provide for what your dependents will really need. The less you pay in life insurance premiums, the more you will have to invest for their future, and optimistically, you will be there to enjoy it.
Savings are another source of income to factor into determining how much life insurance to purchase. Take that amount and subtract it from your final total life insurance sum.
There are other expenses your demise may engender and you don't want to forget them as you try to assess your dependents' future needs.
It is expensive to die. Funeral costs can average over $5,000 and if your family is lavish, over $10,000. Add this figure into your final insurance disbursement.
If you are concerned about losing the house, there are life insurance policies that will pay off the mortgage upon your death. However, it might make more financial sense to just include the mortgage payments in your replacement income figure as the mortgage payoff can increase life insurance premiums. If you choose to give your family some peace of mind when it comes to this costly bit of real estate debt, make sure you deduct that amount from your final replacement figure.
Health Insurance, etc.
Your employer may be providing health insurance for your family that may end when you do. If your family has no group insurance to tap into, the cost of health coverage may rise sharply. Be sure to include this cost in the replacement total sum.
Okay, you have that wonderful replacement figure to cover all exigencies in your family's future, should you depart terra firma a tad early. Now what?
There are two types of life insurance: term life insurance and cash value insurance.