What is
your goal?
Here’s the fun part. You get to imagine you’re dead. Will the
remaining partner stay at home with the kids? Work and pay for daycare? Some
people basically want to replace everything – their future income and also
leave an inheritance or other lump-sum. Others want to make sure their
dependents would be able to live as close to the “same life” as possible. This
means staying in the same house, working (or not working) at the same jobs,
driving the same cars, the same lifestyle. Then there is the “adapted life”
approach, where maybe they would downsize somewhat, but have all the critical
areas covered.
How much
monthly incomes will your survivors need?
It’s usually easier to think of this monthly, and then
multiply by 12. Include housing, transportation, education, childcare,
insurance, entertainment, and perhaps also regular retirement savings. The
average cost of daycare for a 4-year-old is around $8,000 per year. Now
subtract any sources of income. The survivor’s salary, existing passive or
investment income, rental income, Social Security benefits, etc.
Then, you have to decide what amount of money can create this
income. Lots of guessing on your rate of return and length of withdrawal period
is involved here.
Add these two big numbers up, and you have you future capital
needs. You can then subtract out the insurance you have through work if you
like. Finally, you should subtract your current assets, taking into account
their liquidation restrictions. The difference provides an estimate of how much
life insurance to shop for.
This is what most online life
insurance calculators use although I like the idea of doing it by hand to
play with the numbers. I have a brochure from my State Farm agent with some
stats, and also found another good example in this worksheet.
Source: http://lifeinsurancepremiumcalculator.tumblr.com/post/144646761886/calculating-life-insurance-needs-capital-needs
