How big should my life insurance policy be?

One basic rule of thumb is that the death benefit on your policy should equal seven to 10 times the amount of your annual salary. But, like any rule of thumb, that isn't always particularly accurate.

Another way of looking at it: You need to figure out what income you want to provide for your spouse or other beneficiaries when you die. From that sum, subtract all the other income sources they will be able to tap: retirement accounts, pensions, Social Security (for your spouse). The resulting number is the shortfall you'll want to fill with life insurance. This interactive calculator can help you arrive at a number.

Let's say the shortfall is $25,000 a year. A standard insurance principle says to buy a life insurance policy that is about 10 times that amount, or $250,000 in this example. That might be just fine. But such estimates can be misleading. Ideally, you should make the decision based on your specific circumstances - or give yourself a big margin for error. For instance, you might want to buy coverage worth 20 times the annual amount you need to replace.