Estimating Life Insurance Requirements
This calculator takes a comprehensive approach to estimating the amount of life insurance someone should carry. The calculator needs a total of eighteen inputs, including:
Those associated with monthly living expenses, such as:
- Rent or the size of the mortgage payment made each month – this value should include mortgage insurance and property taxes, if any
- Utilities such as water, sewer, garbage disposal, electricity, natural gas, internet access, streaming services, and cellphone plans
- Insurance payments, made monthly such as existing life insurance, medical / dental insurance, homeowners, and automobile
- All other monthly living expenses
Those associated with potential future expenses, such as:
- Sending children to college or university
- Paying for a loved one’s wedding
- Funeral costs
Money owed others in the form of debt balances, such as:
- Balances on all credit cards
- Secondary loans such as home equity, personal, and car loans
- Primary loans such as the remaining principal of a mortgage
Finally, the calculator needs to understand assets available to help pay for costs, such as:
- Funds in an employer’s savings plan
- The equity in the home as well as money in checking and savings accounts
- Life insurance available through other sources such as an employer or an existing policy
The last input required by the calculator is the number of years the prospective insured would like to pay for the costs identified earlier
Using this information, the calculator then provides the user with the following:
- A total of all living and future expenses
- A total of all the debt held by the insured
- A total of all the expenses the insured would like to pay
- A total of all the assets available to pay for these expenses
- Any remaining gap, which would be an estimate of the amount of life insurance needed
Why Buy Life Insurance?
If you’re single and don’t have anyone that depends on you for income, carrying life insurance isn’t a necessity. You might want to buy a policy that provides for funeral expenses or pays off a car, but that’s about all the coverage needed. Most employers provide their employees with a nominal amount of life insurance, which might be enough to cover these costs. If that’s true, you can move right along because you probably don’t need more life insurance.
If you’ve got a partner, or children, that depend on your income then it’s a good idea to think about providing for them in case something happens and you’re no longer around to help with the expenses. This is where a detailed insurance calculator, like the one on this page, can help you think through how much life insurance to purchase.
Categories of Expenses
When thinking about how much insurance to buy, it’s a clever idea to think about costs that occur each month and those that are fixed. Monthly expenses are closely related to your living expenses. If you own or rent a home, then there is a monthly payment due on the home. You will also have utility bills to pay to heat or cool the home, provide electricity, water, sewer, internet access, and cable or streaming services. If you have younger children, then you might need to pay for childcare costs. If you have medical insurance through your employer, then you might need to purchase medical insurance, in addition to homeowners and car insurance. Finally, our calculator has an “other” input that can be used to input any other monthly expense you can think of such as music and dance lessons or participating in a sport.
The next grouping of costs are one-time expenses such as paying for college or someone’s wedding. As mentioned earlier, you might also want to have enough insurance to pay for your own funeral. The last group of costs are those related to debt. Paying off all outstanding credit card balances or a home equity loan removes that burden from loved ones. Life insurance can also be used to pay off personal loans, such as student loans, and even the remaining principal of a mortgage.
Assets Lower the Amount of Insurance Needed
Now that all the expenses and one-time costs are accounted for, it’s time to evaluate assets that can be used to help pay for those expenses. Typical assets include money residing in an employer’s savings plan or cash in a checking or savings account. Although not ideal, equity in a home could also be used to pay for expenses if the home is going to be sold. Finally, if there is an existing insurance policy, then the benefit available through that insurance can be used towards expenses.
The last input for this calculator, Years of Coverage, is an especially important variable since all the monthly expenses are multiplied by 12 months and then by this value to deriving the Living insurance expense requirement – choose carefully.
Interpreting the Results of Our Calculator
The results of this calculator are straightforward. The Living, Future, and Debt expenses are added together to derive the Total money needed. From this value Assets are subtracted to identify the potential life insurance Gap. This value is a “best guess” at the amount of life insurance needed to provide for dependents for the duration identified in Years of Coverage.