three ways to calculate life insurance needs

3 Ways to Calculate Life Insurance Needs

May 17, 2024

Life insurance is your silent promise to those you love, ensuring they remain secure even when life takes unexpected turns. It's about providing a safety net that catches your family financially, making life's hardest moments easier to bear.

Ensuring your loved ones' future financial security in your absence begins with understanding how much protection they truly need. Knowing how much coverage is right for you is crucial, as it directly influences your family's future comfort and stability. Below, we explore three key approaches to calculating your life insurance needs.

1. Human Life Value Approach

The human life value approach is a method that centers on replacing your future income if something unexpected happens to you. Essentially, it evaluates how much money you would earn over the remainder of your working life and suggests securing a policy that matches this total.

Factors like age, current income, expected increases in salary, general living expenses, and inflation rates are crucial for this method. For example, if you are 30 years old, earn $50,000 annually, and plan to retire at 65, the calculation might look like this: 35 years of income at $50,000 adjusted for an estimated 2% annual increase due to inflation and raises, totaling approximately $2.3 million. Using a discounting method of calculation, the current lump sum necessary to provide $50,000 per year for 35 years at 4% would be $970,559.

2. Needs Analysis Approach

Meanwhile, this method quantifies your specific financial obligations to determine the right coverage amount. It assesses various financial needs, such as income replacement for your dependents, paying off debts, funding education for your children, and covering final expenses.

For example, imagine you want to provide your spouse with an income replacement of $40,000 a year for 10 years. You also want to pay off a $200,000 mortgage, fund $50,000 for your child's education, and cover $10,000 in final expenses. Adding these amounts, therefore, you would need a life insurance policy of $660,000 to meet all these needs comprehensively.

3. Multiple-of-Income Approach

Last but not the least is the multiple-of-income approach. It simplifies calculating life insurance needs by using a multiplier of your annual income. Typically, this method advises coverage ranging from five to 10 times your yearly earnings, depending on various factors. These factors include your age, the stability of your income, and any significant assets you already possess.

For instance, if you earn $50,000 annually and are in your mid-30s with a stable job and moderate savings, you might choose a multiple of 10. This calculation would suggest a life insurance policy of $500,000.

Comparing and Contrasting Methods

Each method for calculating life insurance needs has strengths and is best suited to different financial situations and preferences. For instance, the human life value approach is thorough, as it considers a comprehensive assessment of one's economic worth over a lifetime. This makes it ideal for those with long career paths ahead. However, it may overestimate the needs of individuals nearing retirement or those with fluctuating incomes.

On the other hand, the needs analysis approach is precise and perfect for detailed financial planning. It suits those with clear, defined financial goals but requires extensive data.

Meanwhile, the multiple-of-income approach offers simplicity and speed. This makes it suitable for individuals seeking a straightforward calculation without intricate financial details. However, it lacks personalization and consideration for specific financial needs or life changes.

Selecting the Right Method

Selecting the right method to calculate your life insurance needs hinges on understanding your unique financial landscape and future goals. Consider your age, income stability, and specific financial obligations. Consulting with a financial advisor or 1891 Financial Life insurance agent can provide personalized guidance tailored to your unique circumstances.

Additional Considerations for Your Life Insurance

Aside from the basic calculation methods, consider other factors as well, like your future financial goals, existing assets, and any potential changes in your life circumstances. Business ownership, special needs dependents, charitable giving, and estate taxes would figure into the planning strategies. Regularly reviewing and adjusting your life insurance coverage ensures that it remains aligned with your financial situation. Not only that; you can also continuously get adequate protection.

Trust 1891 Financial Life to Help You Determine Your Life Insurance Needs

Choosing the right method to calculate your life insurance needs ensures financial security and peace of mind for those you value most. Understanding your needs based on different calculation approaches empowers you to make informed decisions tailored to your unique financial situation and objectives.

At 1891 Financial Life, we are committed to helping you find the perfect fit with our life insurance options. Whether you're considering term life or exploring other options, we're here to guide you. Get started by using our life insurance needs calculator to estimate your required coverage, and take the first step toward protecting those who matter most to you.

About 1891 Financial Life

Our culture is about looking out — for you, for others, for family, for the community. That is how we go “Beyond Life Insurance.”

At 1891 Financial Life, we pride ourselves on giving back to the communities that we serve by providing quality and comprehensive life insurance solutions. We are a not-for-profit life insurance company, which means the sales from these products help fund member benefits along with social, educational, and volunteer programs designed to respond to community needs.

Our portfolio is extensive, ranging from various life insurance policies to our MYGA to support your financial needs no matter what stage of life you’re in. For more information, contact our friendly experts today at (855) 804-7424.