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1. How Much Life Insurance Do I Need?

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.

Assumptions:

  • 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.

Calculations:

  • 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.

How much life insurance do I need?
Your annual income:
Percent of Income Needed:
Interest Rate:
Inflation Rate:
Number of Years to Replace Income:
Based on the above assumptions, you need approximately $670,520 of life insurance to produce an income of $40,000 for 20 years.
Year Insurance - Income + Interest = Remaining Insurance
1670,520.9140,000.0031,526.05662,046.95
2662,046.9541,200.0031,042.35651,889.30
3651,889.3042,436.0030,472.67639,925.97
4639,925.9743,709.0829,810.84626,027.73
5626,027.7345,020.3529,050.37610,057.75
6610,057.7546,370.9628,184.34591,871.12
7591,871.1247,762.0927,205.45571,314.48
8571,314.4849,194.9526,105.98548,225.51
9548,225.5150,670.8024,877.74522,432.44
10522,432.4452,190.9323,512.08493,753.59
11493,753.5953,756.6621,999.85461,996.78
12461,996.7855,369.3520,331.37426,958.79
13426,958.7957,030.4418,496.42388,424.78
14388,424.7858,741.3516,484.17346,167.60
15346,167.6060,503.5914,283.20299,947.21
16299,947.2162,318.7011,881.43249,509.94
17249,509.9464,188.269,266.08194,587.77
18194,587.7766,113.916,423.69134,897.55
19134,897.5568,097.323,340.0170,140.24
2070,140.2470,140.240.000.00