Calculating Life Insurance Needs: Capital Needs Analysis

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