Roughly Estimating Your Life Insurance Needs

Roughly Estimating Your Life Insurance Needs

It’s rare that I come across a post about life insurance that is a solid read.  Insurance (more so than investing) is a very bipolar field.  People are either drastically against cash value insurance or think it’s the only tool in the toolbox.

And the good and bad posts go on and on about every type of life insurance.  Invariably, the truth is hidden somewhere in the middle of the arguing.

I think that has a lot to do with the fact that life insurance is generally a product that’s sold, not bought.  But, that’s beside the point of this article.

In any case, I came across a great article written by Justin Castelli, CFP® that was simply encouraging people to evaluate their needs and to buy life insurance if they have a family to protect.  I think he’s on the ball with the fact that insurance, whether we like it or not, is a necessary purchase.

That is if you want to protect your family.

I’ll let him do the encouraging of purchasing life insurance and I figured I’d add on with a way to calculate a very rough estimate of what your needs might be.   Disclaimer: I agree with Justin that you need to speak with a qualified financial professional to establish your true need rather than relying solely on this post.

I also have no skin in the game in terms of helping anyone to actually purchase coverage as I do not sell insurance.

With that out of the way, here goes.

Generally speaking, we use life insurance to provide for our family in four ways.

  1. Paying off debts and funeral expenses.
  2. Paying for college.
  3. Paying for a home.
  4. Providing ongoing living expenses.

I’ll provide some rough estimates of various costs.  As you review each of these, write down an estimated cost for you, and then I’ll let you know what to do with them at the end.  I’ve purposely made this article “printable” for you to make notes as you read along.

Paying Off Debts and Funeral Expenses:

When considering your debts, you’ll want to include ALL debts (excluding your mortgage which we’ll get to in a minute).  Examples might be credit card debt, student loans (some of these are forgiven by the government, but better to be safe than sorry), auto loans, furniture loans, and so on.  You’ll want to ensure that your personal balance sheet is clear should you lose your primary breadwinner.


______________ ->  [A] Write down the total of ALL debts (excluding your mortgage).


The cost associated with a typical funeral ranges from $5,000 to $25,000 dependent upon a variety of factors.  If you have no idea, just choose a figure somewhere in the middle.


______________ ->  [B] Write down the estimated funeral cost.


Paying for College:

People differ greatly in their opinions of how to provide for college for their children, but one thing that is pretty consistent is the desire to pay for some or all of college if a parent were to pass unexpectedly.  Some would like to provide a public education and some private.

If you intend to pay for a four-year public education, an estimate to consider might be about $120,000 per child and about $240,000 per child for a private education.  Education costs vary greatly (even more so in-state versus out-of-state), so you’ll want to do much more research on this front.  Also, don’t forget to multiply the total times the number of children you’ll want to provide an education for.

Here is a calculator for some additional insights as to specific college costs.


______________ ->  [C] Write down the estimated college costs you’d like to provide.


Providing for a Home:

Many people simply want their home paid off and are wondering why this wasn’t included in the debts section.  That’s because some people wouldn’t stay in their current home and/or might even consider moving to a different city entirely.

To establish an estimate for this line item, do some quick research as to what a quality home in a good neighborhood and school district might cost in your location of choice.

Then you can either subtract the equity in your current home from the new home purchase price or just play it conservatively and write down the new home cost.  If the answer is to stay right where you are, then write in your estimated mortgage payoff.


______________ ->  [D]Write down your mortgage payoff OR cost of a home in a new location.

Providing Ongoing Living Expenses:

No matter your personal life situation (children or no children), you will have ongoing living expenses.  This is the most complicated calculation, but we’ll try to make it digestible.  Here is how you might get an estimate of this.


______________ ->  [1] Calculate your TOTAL monthly take-home income.


______________ ->  [2] Calculate TOTAL current monthly debt payments (for debts paid off above including mortgage or rent payment since you would now own your home outright).


______________ ->  [3] Estimate Your Social Security Benefits (this can be found on your social security statement by logging into the website).  NOTE: If you plan to keep working after the death of your spouse and make above a certain threshold, you may not be eligible to collect social security.  Your children may still be eligible for benefits regardless of whether you work or not.  There are A LOT of moving parts to Social Security survivor benefits, so it would be of great benefit to take a look at those and become familiar with your Social Security benefits statement.


______________ ->  [4] Estimate the surviving spouse’s continued net income.


______________ ->  [5] Estimate other incomes such as pensions and rental property income that would be immediately available if applicable.


Once you have those figures, do the following calculation.


Figure [1] minus figure [2] = Income Still Needed


Income Still Needed minus figure [3] minus figure [4] minus figure [5]= Income still needed on a monthly basis [6]


Next, take the figure you just calculated [6] and multiply that times 300.


______________ ->  [E] Write the figure you just calculated here.


What you end up with is a lump sum amount that assuming a 4% withdrawal rate would provide the needed income.  To mitigate any confusion, let’s take a look at an example.


Data Example:

Net Take Home Pay = $10,000 [1]

TOTAL current Monthly Debt Payments = $3,000 [2]

Estimated Social Security Benefits = $3,000 [3]

Estimated Surviving Spouse Income = $2,000 [4]

Estimated Other Incomes = 0 [5]


Calculations Sample:

[1] $10,000 – [2] $3,000 = $7,000


$7,000 – [3] $3,000 – [4] $2,000 – [5] 0 = $2,000 [6]


[6] $2,000 x 300 = $600,000 [E] Lump Sum Needed for Ongoing Income Needs


Where does this $600,000 figure come from?  We’re assuming that you could withdraw 4% of the principal each year to provide ongoing living expenses.  If we look at the math, it will hopefully make more sense.


$600,000 x 4% = $24,000 / 12 months per year = $2,000 per month that technically could be provided from a lump sum of $600,000.  Note that this is a hypothetical assumption.  Whether this 4% withdrawal rate is sustainable will be based on the portfolio’s allocation as well as overall market performance.


Final Calculation:


______________ ->  [A] Total of All Debts

+ ______________ ->  [B] Estimated Funeral Expenses

+ ______________ ->  [C] Estimated College Costs

+ ______________ ->  [D] Providing for a Home

+ ______________ ->  [E] Providing Ongoing Living Expenses




There are many more calculations that can be done to get a better estimate and I encourage you to do just that.  I’d also encourage you to seek out the assistance of a professional that can help you identify the right type of coverage.

But even if you go to a website that you can purchase term insurance through a highly rated insurance company, knowing you have a rough estimate of your needs will be a pretty good start.

Again, please do not rely on this as your ONLY calculation.  There are many moving parts to calculating your actual insurance needs, the most confusing of which is establishing a good estimate of Social Security benefits and income needs.  So, please do your homework, your family is depending on it!



Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.  Please see my Terms & Conditions page for a full disclaimer.

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