Tree Logo. Life Insurance Needs Calculator

Life Insurance Calculator.

As anyone with a family knows, you need to plan to provide for your family, even after you’re gone. This calculator will help you determine what your life insurance needs are.

First enter potential funeral costs and estate taxes. Then include amounts needed for non-mortgage debt, emergency expenses, and college funds. Then enter annual living expenses, your spouse’s annual income after taxes, and annual Social Security benefits. Then indicate your spouse’s current age and the current value of liquid assets. From the pull-down menu, decide whether your surviving spouse’s investment strategy will be “conservative” or “aggressive.”

Press CALCULATE, and you’ll get a dollar amount for your life insurance needs.

Funeral cost, estate taxes, etc. ($):
Amount needed to pay off non-mortgage debt ($):
Amount needed in emergency fund ($):
Amount needed in college fund ($):
Expected average annual living expenses ($):
Expected spouse's average annual income after taxes ($):
Annual Social Security Benefits ($):
Spouse's current age (#):
Value of current liquid assets ($ total of savings, investments, etc.):
Expected survivor's investment strategy:

Estimated life insurance needs:


How Much Life Insurance Does Your Family Need

Buying life insurance to provide for your family in the event of your death is one of the most responsible decisions you can make. With so many variables to consider, it's important to understand how much coverage you require and what type of policy suits your needs best.

You can assess your needs more easily by answering a few basic questions. Things to consider include your current age, your children's age, their future education needs, and debts still owed if you die.

Ideally, you want to contribute enough income for your family to continue with their standard of living and fulfill any future needs.

Determining How Much Life Insurance You Need

Life insurance is designed to take care of your family's immediate as well as future needs. Do you have a mortgage and other debts that require the joint income of both you and your spouse to make payments? If so, how much money does your spouse need to keep up with debt and provide for the family's future?

If you have children that have not yet graduated from college, you should also consider the additional amount needed to supplement your spouse's income to safeguard your children's education expenses.

If you do not have dependents, and you and your spouse can both pay marital debt in the event of death, you may only need a small burial policy or no policy at all.

There are two standard ways for calculating the amount of insurance needed: the multiple of income method and the shortfall calculation estimate.

The multiple of income method is an easy calculation based on the simple principle that immediate and future needs will equal about 10 times your current annual income. That means if you make $50,000 a year, you will need a life insurance policy that pays around $500,000.

The second way to calculate insurance needs is through a shortfall calculation. With this formula, you begin with the amount of income you would like to give to your family for a certain number of years. Once you have estimated an amount, you then subtract income your beneficiaries receive as employment or investment income to calculate your shortfall amount.

The calculation would look something like this:

Amount Set Aside Per Year Number of Years Total Deduction for Beneficiaries Wage or Other Income Shortfall Amount
$50,000 10 Years $500,000 $300,000 $200,000

The calculation above would result in an insurance policy with a lump sum payment of $200,000. Once invested, the initial payment of $200,000 can also yield a return of an estimated 5 percent that will supplement the income of the beneficiary even more.

A Vulture Getting a Selfie With the Grim Reaper.

Calculating a More Realistic Ballpark Figure

If both you and your spouse work, you might find that a $500,000 policy is enough. After all, your spouse can invest the money at an average of 5 percent interest and yield an extra $25,000 per year in investment income.

However, if your spouse does not make enough and needs more than a supplement to his or her income, you might find that you are underinsured with $500,000.

To estimate a ballpark figure, calculate the amount of income you and your spouse contribute toward household expenses. If you find each spouse gives equally, you need to arrange to supplement your full income for your family should you die. To do this, divide your current income by five, which represents the amount you would expect to yield on the money if you invested it with a return of 5 percent.

So, if you make $40,000 per year, the calculation will be as follows:

$40,000 divided by 5 for a sum of $800,000.

The life insurance amount needed to sustain your spouse's current standard of living is $800,000. Insurance in this amount allows for a sustained income of $40,000 per year for your family.

You might notice that this figure does not consider inflation. That is because as you age, the amount of income your family needs should decrease as your family's financial needs dissipate. The offset eliminates the need to calculate for inflation.

When you compare this amount with the amount estimated by the multiple of income method, you can see where that theory might fall short. When you multiply a $40,000 salary by 10, you're estimating your needs at $400,000. This would be a $400,000 deficit when compared to the sum calculated by the ballpark figure.

Type of Insurance Makes a Difference

Life Insurance Cartoon.

Understanding the common types of life insurance available is important when trying to reach a decision on what is best for your family. Let's face it, life insurance is not cheap. Being able to afford the $800,000 policy might be difficult. Especially when you are young and first contemplating the need for a life insurance policy, premiums can be frightening.

There commonly two types of policies: term life and whole life.

Term life policies are great when you need a large amount of insurance but do not have enough money to pay the larger premium of whole life (permanent) insurance. Term life policies expire after a certain number of years, but can be renewed for another term. A term life policy can help meet your family's immediate needs as well as their future needs, providing you are insured for the proper amount.

A whole life policy is a permanent policy that does not expire as long as you are paying the premiums. It is more expensive to buy a whole life policy, but once the policy matures you can convert it to cash. Some policyholders choose to combine both a term life and a whole life policy.

Once you understand the basics of common life insurance it is much easier to calculate the amount you will need to insure yourself and take care of your family's needs both now and in the future. Have peace of mind knowing that if you should die your children will still be able to attend college and that your spouse won't have to face the horrible reality of bankruptcy or foreclosure.