You may choose to buy enough life insurance so when combined with other sources of income, it will replace the income you now generate for your dependents, plus enough to offset any additional expenses your dependents will incur to replace services you provide.

You may also plan to replace “hidden income” that would be lost at death. This is income that you receive through your employer that isn’t part of your gross wages. It includes things like your employer’s subsidy of your health insurance premium, the matching contribution to your 401(k) plan, and many other benefits.

Of course, you should also plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with finalizing an estate.

Other sources of income

Most families have some sources of post-death income besides life insurance. The most common source is Social Security survivors’ benefits. Many people also have life insurance through an employer. If you have a vested pension benefit, it might have a death component. Although these sources might provide a lot of income, they rarely provide enough.

Should I purchase life insurance as a multiple of my annual salary?

Many sources recommend buying life insurance equal to a multiple of your salary. For example, one financial advice columnist recommends buying insurance equal to 20 times your salary before taxes. The “multiple of salary” approach also ignores other sources of income, such as those mentioned previously.