A common way to estimate the amount of life insurance for families is through income replacement. It’s easy to understand, and fits well with the basic principles of life insurance. Effectively we value your life insurance needs based on your paycheque – because financially it’s what is lost upon your death (and therefore what we should insure). Scroll down for a calculator.
- You want to maintain your family’s current lifestyle.
- Your family’s current lifestyle is funded by your income.
- If you replace your income after your death using life insurance then your family maintains their current lifestyle.
- We calculate your life insurance amount as a lump sum that will allow your family to draw down your ‘replacement’ paycheque after you’ve passed. Financially, your family maintains it’s status quo.
- Use your gross annual income (before taxes).
- People commonly assume that they don’t need all of their income replaced. 60-80% replacement is commonly assumed, however use whatever number you feel comfortable with.
- Interest & Inflation, use conservative numbers.
- Number of years to replace is often either ‘until the kids are out of the house’ or ‘until you retire/would have stopped earning a paycheque’.
- Use this calculator to get a feel for ranges – try different timeframes, percentages, etc.
- The resulting table shows how a lump sum life insurance payout will reproduce your income for the timeframe that you pick – with nothing left over.
|Year||Insurance||- Income||+ Interest||= Remaining Insurance|