How Much Life Insurance? - Income Replacement

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How Much Life Insurance? - Income Replacement

The theory behind this approach is that you should purchase insurance equal to the present value of your future anticipated earnings. Factoring into the formula your current salary, an anticipated annual increase rate, an earnings rate and your work life expectancy, you can arrive at the amount of life insurance that you should purchase. An example would clarify this approach:

Current Salary $50,000

Expected Annual Raises 3%

Current Age 30

Retirement Age 65

Expected Earnings Rate 9%

Estimated Life Insurance Needs $783,129

Notice that this amount is higher than the calculated amount using the rules of thumb discussed previously. This approach has some merit but fails to address the issue of retirement needs for the surviving spouse and whether the surviving spouse is employed and contributing to the family income. The following methods address the issues that the rules of thumb and the income replacement methods do not.

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