How Much Life Insurance Do You Need?

Two methods are commonly used to determine your life insurance needs: the (a) expense needs formula and the (b) income replacement formula. You should try both and compare the results

The (a) expense needs formula itemizes your family needs to determine how much insurance is necessary. Add together the items below:

Expenses Needs

Funeral Expenses

Legal Fees

Estate & Gift Taxes

Business Buy-out

Probate Fees

Medical Deductible

Emergency Fund

Mortgage Expense

Rent

Debts & Loans

College

Child care

Private schooling

Emergency fund

Maintenance

Guidelines

Usually $5-15k

Set by court

A % on estates over $600,000

Your percentage of business

Authorized by probate courts

Consider your deductible ceilings

6-9 months expenses

Mortgage balance

Rent for 10 years

Enough to pay all debts

Total projected college costs

Total from infant until school

Costs until college

3 to 6 months total expenses

Cleaning and repairs for 10 years

Total $_______________

Total Coverage Needed - (minus) current life coverage, bank savings accounts, and other assets. This is what your family would need after you’re gone. It will look like this:

Total expenses

- Life insurance

- Cash & savings

= Expense or insurance needs formula

The (b) income replacement formula is based on the your annual income and is used if you’re still working. If you’re retired, include your pension if it ends at your death. Multiply your annual income by how many years you want your family supported (usually until you retire).

It would look like this:

Annual income

X years until retirement

= Income replacement method

Another income replacement method is to multiply your annual income times 10, or multiply your annual income x 5 + your mortgage.

Annual income

X 10 (years)

= Income replacement method

~OR~

Annual income

X 5 (years)

+ Balance owed on your mortgage

= Income replacement method


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