Replacing your financial support
Life insurance exists so that the people who depend on your income are not left in financial difficulty if you die. The right amount is not a percentage of your salary but the gap between what your family would need and what they would already have. This calculator uses a needs-based method, the approach most financial planners favor over simple rules of thumb.
What the calculation includes
Needs:
- Income support: the yearly amount your family would need, for as many years as they would depend on you, converted to today’s value at a modest return after inflation.
- Debts: car loans, credit cards and personal loans.
- Mortgage: the balance, if you want your family to own the home outright.
- Education: the expected cost of college for your children.
- Final expenses: funeral and estate costs, often $10,000 to $15,000.
Resources already in place:
- Savings and investments your family could use, excluding retirement accounts they should keep.
- Existing life insurance, including group coverage from your employer.
Worked example
A parent wants to provide $60,000 a year for 10 years, assuming the payout earns 2% above inflation. The family has $15,000 of debts, a $250,000 mortgage, plans $100,000 for college and expects $15,000 of final expenses. They have $50,000 of savings and $100,000 of group life insurance.
- Value of the income support today: $538,955.
- Total needs: $918,955.
- Resources: $150,000.
- Additional coverage needed: $768,955, about 10.3 times the parent’s $75,000 income. A $750,000 or $800,000 policy would be the practical choice.
Choosing a policy
- Term life covers a fixed period, such as 20 or 30 years, ideally until children are independent and the mortgage is paid. It is by far the cheapest way to buy a large amount of coverage.
- Whole life and universal life last for life and build cash value, but cost several times more per dollar of coverage. They suit specific needs such as estate planning.
- Stay-at-home parents need coverage too: replacing childcare and household work can cost $30,000 or more a year.
Review regularly
Recalculate after a birth, a home purchase, a large raise or when debts are paid off. Needs usually fall as children grow and savings build up.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.