Calculating Your Life Insurance Need

Life Insurance

Attempting to figure out what our Life Insurance needs are is not as difficult as many would believe. It all comes down to a brief analysis of three basic areas of our financial situation to come up with an answer to our problem.

Income - What is our annual net income (after taxes) that would need to be replaced if we were no longer here tomorrow to generate it? Once that is figured out, how many years would that income need to be replaced for our family to remain comfortable at the same standard of living they have now?

Assets - What property, physical or monetary, do we have that could be used to either generate income or be sold to generate income and provide for the needs of our family if we are no longer alive? This could include home ownership or renting it out, savings, retirement plans (net worth after taxes), stocks, owned autos, and even other life insurance etc.

Liabilities - What debt do we currently have that would need to be paid off when we pass away? This would be any form of loans, intent to pay for our children’s college, and even final expenses, like funeral and burial costs and 6 months of income replacement.

Once we know these very basic elements to our final situation then all we have to calculate is the following:

(Annual Income X Years of Replacement) + Total Liabilities - Total Assets = Life Insurance Need

For example: Tom has a net annual income of $50,000 and has two young children that he wants to make sure they are protected through college, so he figures replacement of 20 years would be correct.

Tom has not planned for final expenses and believes that 35k would be an accurate assessment amount to pay for those costs and 6 months income replacement. Tom currently owes 110k still on his mortgage and 25k on a home equity loan.

He also currently has no other life insurance, but has a 401k at work with 200k in it (about 150k after taxes are paid out), and owns his truck which is worth about 20k:

(50k X 20years = 1M) + (35k + 110k + 25k = 170k) – (150k + 20k = 170k) = 1M Life Insurance Need

The life insurance policy needed for Tom to protect his family is 1M for 20 years.

About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at   1-800-651-1953 or KMcDonald@Pivot.com.