Life Insurance Needs Analysis
- A simple review of your financial status and future requirements can help determine how much life insurance you and your spouse may need to protect your family properly.
- Use the following guidelines to complete the Life Insurance Needs Analysis Worksheet.
Current Cash Requirements
| a. | Final expenses This estimated cost includes medical expenses not covered by your healthcare policy (deductible plus any coinsurance), funeral expenses (estimate $5,000 to $10,000) and probate costs. |
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| b. | Emergency fund Financial experts recommend that you save up to six months salary for any household or personal emergency that may arise. The emergency fund might be larger or smaller, depending on your family's circumstances. |
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| c. | Mortgage balance It's a good idea to select a life insurance benefit large enough to pay off the mortgage balance. |
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| d. | Outstanding loans Determine total outstanding debts (principal), such as auto loans, personal loans, credit card balances and so forth. |
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| e. | Education costs Calculate future college expenses for your children. The current average costs are $24,946 per year for a four-year private school education and $11, 338 per year per child for a four-year public school education. This includes tuition, fees, books, supplies, room and board, transportation and other personal expenses. The cost of a college education can increase by 5 percent annually. (Source: College Board Annual Survey of Colleges, 2000-2001). |
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Long-term Cash Requirements |
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| f. | Monthly income required Take the annual gross income your family will need to supplement income receivable from existing sources. Generally, it is estimated that a family will require 60-80 percent of prior total income following the death of one spouse. Existing sources of income could include the surviving spouse's earnings, Social Security survivor benefits, rental income and employer-provided benefits. Determine only the additional amount needed after considering all available sources of income, then divide by 12 months. For example $40,000 X .70 / 12 = $2,333 (monthly income replacement amount). |
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| g. | Cash reserve factor To complete line h, multiply the total monthly income (g) by the factor from the chart below, located to the right of the number of years your family will require monthly income. For example: You determine your family's needs for the next 20 years at $2,500 per month. $2,500 X 218.6748 = $546,687. This formula is based on a time value analysis for determining future cash needs, assuming a 3 percent annual increase in inflation and a 4 percent return on the lump-sum death benefit.
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How much will life insurance cost?
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