To address this guessing game, insurance companies and financial planners have devised models to help you zero in on this perpetually moving target. Three approaches are most common.
1. Multiple of income
This industry standard recommends that the death benefit, or payout amount, of your life insurance policy should be seven to 10 times your annual income.
"So if somebody is making $100,000 a year, somewhere between $700,000 and $1 million would be the life insurance amount to keep a family in good shape if this person dies," explains Etti Baranoff, an associate professor of insurance at Virginia Commonwealth University.
But Daily cautions against putting too much faith in this rule of thumb. "How could you come up with the same number whether you have one child or 10? Or one house or several?" he wonders.
2. Shortfall calculation
The shortfall approach works backward from the annual income you would want to leave your spouse and family for X number of years. After you decide on this target number, you then subtract all other sources of annual income that will be available to them, such as your retirement accounts, pension, savings, your spouse's salary and Social Security. The resulting number is the shortfall you'll want to replace with life insurance.
"People overlook that they'll likely have other assets," says insurance literacy advocate Tony Steuer, author of "Questions and Answers on Life Insurance." "Right now, you may be just starting to save for retirement, but by the time you actually retire, you'll have $500,000 or $1 million in your retirement plan, so you may no longer need that $500,000 life insurance policy."
3. Income generator
Some prefer to set their sights on building up a large life insurance investment that would generate earnings to provide a beneficiary with annual income. For instance, $1 million invested using a conservative average annual yield of 4 percent could provide $40,000 a year to a spouse or family in perpetuity.
"While the need for life insurance is temporary for most dependents, there are exceptions, such as a special needs child who will never be self-supporting, where the need lasts the rest of their life," says Steuer, who is also the director of financial preparedness for the insurance consumer group United Policyholders.
Daily says that while no single model fits all families, everyone can benefit by test-driving one or more.
"The good thing about looking at the future and not just the present is that you're going to get some idea of whether your insurance need goes up, down or remains about the same," he says. "That's going to have some relevance for what type or combination of insurance you should buy."
Then, choose the flavor of policy
Once you arrive at a ballpark coverage figure, Steuer suggests letting your individual circumstances dictate whether to use a cash-value whole life (permanent) policy, term life or a combination.
"One tactic I recommend is to separate the planning for your spouse from the planning for your children because the timeline for needing coverage may differ," he says. "If you have a 15-year-old child, then you really only need a 10-year term policy to see the child through college. But if you're 45 and plan to work for another 20 years, your nonworking spouse is going to need a 20-year life insurance policy, at least."