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  • How do I calculate my life insurance needs?
  • July 1, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    The human life value concept deals with human capital, which is a person’s income potential. It goes beyond just the numbers, and considers the overall impact of losing someone, especially the breadwinner

    Calculating one’s life insurance needs with this process involves multiple steps. The Future expected earnings of the insured needs to be capitalized and the present value of the income flow to the family, for the time frame needed, to be determined.

    How to Calculate

    Step One

    -Estimate the insured’s earning for a period of time, which replacement would be needed.

    -Take into consideration both the “average” annual salary and any future salary increases of the insured.

    The human life value concept is another way to calculate life insurance needs.

    -Including “growth” of earnings will have a significant impact on your life insurance needs.

    Step Two

    -Subtract from earnings a reasonable estimate of annual taxes and living expenses spent on the insured, in order to arrive at the actual salary needed to provide for family needs. Commonly, this is percentage of salary.

    -It is often suggested that the survivor will need about 70% of the pre-death income to carry on after the insured’s death. This percentage will vary from family to family, depending on their individual budgets.

    Step Three

    -Determine the length of time the net earnings need to be replaced. This could be until the insured’s dependents are fully-grown and no longer need financial support, or until the assumed retirement age of the insured.

    Step Four

    -Select a rate in which to discount the future earning. A conservative estimate rate of return would be the return on the U.S. Treasury bills or notes, of the rate of return paid for death precedes left on deposit with the insurance company.

    -A life insurance company will leave a death benefit in an interest-bearing account and a safe assumption would be the rate on a money market or certificate of deposit (CD) account.

    Step Five

    -Multiply the net salary needed by the length of time needed to determine the future earnings.

    -Calculate the present value of the future earning using the assumed rate of return, which can be performed using a spreadsheet, specialized software, a financial function calculator, or by using discount interest tables.


    Let’s assume you are 40 years old and make $65,000 per year. After examining your family budget, it is determined that $48,500 per year is needed to support your family. It is also determined that this income would need to be replaced until retirement at the age of 65 (25 years). If we assume a 5% discount rate, the present value of your future net salary would be $683,556.

    This method is ideal in situations where replacing the income lost, due to the death of a breadwinner, is the primary concern. However, this method only factors in the replacement of the income and does not take into account any lump-sum needs at death.

    In addition, a client’s financial situation might be more complex and may even require additional analysis. For example, the issues of funding a college education, integration with Social Security benefits, paying estate tax, and determining other sources of income are not included in this method.

    The Life Foundation offers a simple, easy-to-use life insurance needs calculator, which is accessible by clicking here.

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

Creative Commons License
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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