To be more detailed, Life Insurance benefits, upon your death, can:

• Provide a lifetime income stream for your family

• Pay for your final expenses (funeral and other costs)

• Provide liquid assets that your executor can use to settle your affairs without selling anything

• Pay off debts due immediately upon your death, like a car loan

• Pay off your mortgage, and other debts you may have

• Provide an inheritance for your children or grandchildren

• Provide an endowment for your favorite school or non-profit organization

• Provide for those big expenses in life; childcare, a college education, a child’s wedding

• Fund your family’s budget for many years to come

• Offer ready funds for your business

• And many other uses

1) Adding Up The Costs: 

To start, estimate what your family members would need after you’re gone to meet immediate, ongoing, and future financial expenses Then, add up the resources your surviving family members could draw on to support themselves. These would include things like a spouse’s income, accumulated savings, life insurance you may already own, etc. The difference between the two is your need for Life Insurance. (try the calculator to run the numbers)

This mathematical equation may seem simple enough, but coming up with all the inputs can get tricky. Plus, you’ll need to factor in the effects of inflation and assumptions about how much your investments will earn over the long run. Plus, what if you miss something? A family figuring the amount 20 years ago would not have known to figure for a monthly cell phone bill!

2) Replicating an Income:

Your family budget is most likely funded by one or two incomes (if both you and your partner both work). In this option of determining Life Insurance benefit we choose an amount of money that could fund the family budget, so that the budget continues without interruption, even if a spouse died. The Life Insurance policy’s death benefit replicates the deceased family member’s income for a period of years; 10, 20, 30, etc.

Example:

A married couple with 2 children, each adult working with an annual income of $45,000.  The $90,000 income allows the family to pay for all the ongoing expenses in a family, and even save for the future expenses, like college and retirement.  To replicate an income each spouse could carry a Life Insurance policy with a $750,000 benefit. 

How did we figure that?  Let’s say one spouse died, and the other spouse received the $750,000 as beneficiary.  The surviving spouse could invest the $750,000, and at an annual 6% return, use the money made in the investment each year ($750,000 x 6% = $45,000)to replicate the second income. Nothing changes financially.

A more conservative beneficiary might just put the money in the bank, with no interest. Then the $750,000 would last almost 17 years ($750,000 / $45,000 = 16.66 years).

A quick way to come to that number in this idea of replicating someone’s income with Life Insurance is to multiply your annual income by 16.67.