Page Title Life Insurance Needs Worksheet     Return

Determining the amount of insurance you need is not an exact science. Nevertheless, the worksheet that follows will help you get to a good ballpark figure. If you’ve got a sizable estate though, or if you are uncomfortable following this worksheet, you should seek the advice of a qualified fee-only estate planner (see www.NAPFA.org for a list of estate planners near you).

Whatever you do, be sure to ignore any “rules of thumb” as a basis for your life insurance needs. A rule of thumb may be a shortcut to an answer, but you could wind up with an answer that will cost you unnecessarily, or conversely, leave your loved ones without adequate financial resources. Rules of thumb only apply to averages, and your particular circumstances may not be average.

Besides, determining how much life insurance you need is not that difficult. In concept, you’re simply finding the difference between the amount of financial needs your family will require in the event of your passing and the amount of financial resources that would be available to them. The worksheet on the next page will help you work through that process.

Just take it one step at a time. When addressing each line, consult the instructions below and follow the worksheet for a clearer understanding of what that line should include. And if you get to a line that you don’t know or can’t readily determine, don’t worry, ballpark figures will do. If it will make you more comfortable, you may even want to complete the worksheet under three scenarios: high, low, and middle. That should give you a range of benefit needs to work with.

In the end, you will probably choose to round up or round down to a “round number” anyway, so don’t sweat the details.

Future Expenses
Line 12.	Income needs. These are your family’s basic recurring expenses for food, clothing, utilities, gas and auto repairs, medical care, etc. less any income that will still be available to the family from other sources. Do not include your mortgage payments, but do include your property taxes and homeowner’s insurance. This is probably the most difficult amount to estimate, so you may want to arrive at a range from high to low.
	First, add up the approximate amount of all monthly expenses your family would need to continue paying. You can get a good handle on this by looking at the checks you’ve paid over the last few months and averaging them to arrive at a monthly average.
	Next, determine what monthly income you expect your family to continue to receive after your death. This can include Social Security survivor benefits, pension plan benefits, your spouse’s monthly income, etc. Don’t include investment income or income from retirement accounts though. Those will be factored in later.
	Then, subtract the monthly income amount from your family’s monthly expenses to determine a net monthly income need, and multiply this difference by twelve to get the annual amount of income needed.
	Finally, multiply this annual amount by the number of years you reasonably expect your dependents to need the income. If your children are grown and your spouse is in his or her 50s, then you might assume 20 to 30 years. On the other hand, if your primary reason for buying insurance is to provide for your young children, then use the number of years until your youngest child turns 18 or would graduate from college.
Line 13.	Emergency fund. Many financial planners suggest having an emergency fund of at least two to six months of after-tax income. Determine your current after-tax monthly income and multiply that number by two at the low end or six at the high end.
Line 14.	Child-care expenses. Do you have young children in day care or children in a private school? If so, estimate the annual cost for each child and multiply that by the number of years remaining before the child leaves day care or private school. Total this expected expense for all children.
Line 15.	College tuition. How much do you expect to contribute toward your children’s college education? Be sure to consider room and board, books, transportation, and personal expenses in addition to the actual tuition costs. Tuition varies widely depending upon the college, but you can get national averages for public and private college tuition costs at www.collegeboard.com.
Line 16.	Total Future Expenses. Total lines 12 through 15.
Line 17.	Total Financial Requirements. Total lines 5, 11, and 16. This is the estimated total amount of money your dependents will need before considering any existing family assets.

One caveat about this worksheet: For simplicity sake, this worksheet does not take into consideration inflation or the time value of money. This may not be a concern if the family’s income from wages and investments keeps pace with inflation. In a hyper inflationary environment though, you would want to increase the amount of insurance needed to compensate for inflation’s impact on future expenses.

Source: TheStreet.com, Inc.

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