Here's an interesting analogy we'll call the "money machine." If you had a machine that made you $100,000 per year every year without fail, how much would you insure it for in case it broke down, got stolen etc.? Probably, all the insurance you could get.... but realistically you'd want to insure it for its replacement value just like you would with a house or any valuable.

So, how do you calculate the replacement value of that machine?

Let's start with an analogy. Ideally, how much should you insure your house for? Enough to rebuild and replace; right? Well, you can also look at the economic value of your life. If you die the income stops, and if others depend on that income then that should be replaced.

The amount of money needed to replace the income that wouldn't be made if one dies, is called one's human life value . Take your income and use an interest rate that one could earn today. Let's use 5% for this example. Let's say your income is $100,000 per year. To replace $100,000 per year at a 5% return, you take the income and divide it by the interest rate. ($100,000 divided by 5% or (.05). The answer is $2,000,000. To prove that out, multiply 5% X $2,000,000 and youll see that you get the $100,000. That would be a fair amount to insure the machine since you could invest $2,000,000 at 5% and have your $100,000.

So, in very rough terms that's how you figure out your human life value and it's a goal to shoot for in coming up with the answer to "How much life insurance?" To review: Put your annual income in a calculator and then divide by .05 (or the interest rate of your choice) and there you go, one's human life value.

Now turning to one's life, financially, you're the money machine! If you, as that money machine, broke or didn't work you should have disability insurance and if you have people that depend on you financially you should have the proper amount of life insurance.