Simple Life Insurance Needs Analysis

One of the primary uses of life insurance is a replacement of income in the event of an untimely death. In most cases a term life insurance policy is the most effective tool for this kind of “disaster management” insurance policy. The question then arises, How much insurance do you need? Simply put, you need to leave your spouse enough to cover the shortfall between the working cash she’ll earn, inherit or win in Vegas and the costs she’s likely to face over the rest of her life. Here’s a quick 2 minute estimator:

How much money will she have to work with: Your spouse’s annual income: X number of years to retirement: = Projected lifetime earnings: + Cash + Investments + Expected Retirement Income + Expected Inheritance + Existing Life Insurance = Total Spousal Working Capital

Your spouse’s expected annual expenses X number of years projected lifespan = Projected lifetime living expenses + Annual Mortgage/Rent/Taxes X number of years = Projected lifetime home expenses + anticipated childcare, education and college costs + outstanding debt + random extra money your wife might want to spend + funeral and settlement costs = Total lifetime expenses

Subtract the expected lifetime expenses from the working capital number and you get a loose estimate for your projected financial shortfall if you were to die prematurely. It is not an exact number, and doesn’t take into account the timing of the earnings or expenses. Its generally a good idea to double the number or round up to be sure that you have sufficient assets to make up for the lost income.

A second approach is to determine how much income you bring in each year. If your spouse took your insurance settlement and invested it safely at a 4% return, or took an annuitized payout to guarantee income for life, you would need to leave about 25 times your annual income.


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