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ReliaQuote's needs calculator is designed to estimate
the amount of life insurance you need based on your own assumptions
and personal data. The assumptions you use should be made
on the premise that if you died tomorrow, this is how you would
want to provide for your family. The calculator is separated
into 4 sections: Immediate Cash Needs, Income Replacement, Children's
Education Funds and Funds Available at Death.
Immediate cash needs are expenses or liabilities
that require cash immediately after death. They may include
funeral expenses, estate administration expenses and fees, unpaid
medical bills, a mortgage, and other debt. Some of these expenses
are absolute necessities, whereas others are not.
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For example, if you died you may
want to have all debts and mortgage paid off for your family,
or you may want only a portion of these paid off. |
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Income replacement will, in most cases, be your primary
insurance need. In this section, it is necessary for you to
enter the annual after-tax
income replacement your family will need and the number of years
they will require it. Factors to take into consideration are:
- Make sure the income is sufficient to maintain your family's
standard of living.
- Make sure there is enough for your spouse to save a portion
of the income for his or her retirement.
- If you have children and you are relying on your spouse to
earn an income when you die, then you may want to reconsider how
much that spouse will earn. Since one parent is deceased,
the children will require more time with the surviving souse.
The surviving spouse may need to start working part-time, change
jobs or not work at all so that more time can be spent with the
children.
In addition, you should enter the after-tax annual growth rate of the
insurance funds that will produce the income. In order to
produce an income stream, the insurance fund (lump sum of money)
must be invested at a certain rate of return (a 6% after-tax rate
of return is reasonable in this situation). Income will be
distributed or withdrawn from this insurance fund for a specified
number of years and, at the end of the distribution period, the
insurance fund will equal zero. The inflation rate also must
be entered because the income stream should be increased each year
to keep up with inflation (a reasonable long-term assumption for
inflation is 4%).
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For example, if you want to provide
$50,000 per year after-tax to your family for 20 years assuming
a 6% after-tax growth rate and 4% inflation, then you would
require: $839,513. Why? $839,513 today growing at
6% after-tax would produce an income stream of $50,000 (increasing
by 4% a year) for 20 years. The annual income stream should
increase each year to keep up with inflation (eg.10 years from
now it will take $71,166 to have the same purchasing power as
$50,000 today). At the end of 20 years, all of the insurance
fund would be used up. |
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If you have children, you may want to ensure that
their college education is paid for. If so, enter the child's
name, age, annual college cost (in today's dollars), after-tax annual growth rate for the
insurance fund, and inflation rate. The annual college cost
is the tuition, room and board, and living expenses.
- The average annual college tuition/room and board for public
schools is approximately $7,600.
- The average annual college tuition/room and board for private
schools is approximately $19,300.
The growth rate is applied to the insurance fund
that will be used to pay for college (a 7% after-tax rate of return
is reasonable in this situation). The insurance funds are
invested and will grow from your child's current age until the child(ren)
reach their first year of college. The inflation rate applies
to the annual rate of inflation of college education costs.
The tuition inflation rate varies from college to college, but a
reasonable long-term rate of inflation is 6%.
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For example, if you want to pay
for your 8 year old child's 4 years of college education costs
(assuming the annual college costs in today's dollars is $20,000,
the after-tax growth rate of your fund is 7% and the long term
inflation rate is 6%) you would need $72,830. Why? If
you died tomorrow, you want to make sure your 8-year-old can
attend college when he turns 18. Since your child is 8
years old, he has 10 years remaining until the first year of
college. If $72,830 was invested at 7% (for the 10 years
prior to college) it would grow to $143,267 and then produce
an annual income stream to pay for 4 years of college.
Remember that the annual college cost of $20,000 today is being
inflated by 6% a year to keep up with the rising education costs.
Assuming 6% inflation, today's annual college cost of $20,000
would cost $35,816 ten years from now. |
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The funds available at death are the funds or assets
you currently hold that can be liquidated to help pay for expenses
associated with Immediate Cash Needs, Income Replacement, and College
Education Fund. Funds available may include:
- Existing life insurance policies that you do not intend on replacing.
- Savings and money market accounts
- Stocks, bonds, and mutual funds
These funds will be used to offset the initial amount
of life insurance you need. Make sure you review your employee benefits
hand book to find out how much life insurance coverage you have
through work.
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For example, the information entered
in the Immediate Cash Needs, Income Replacement, and College
Education Fund will add up to a specific amount of capital needed.
Next, the input in the Funds Available at Death will be subtracted
from the capital needed, therefore producing the Additional
Life Insurance Needed |
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Immediate Cash Needs + Income
Replacement + College Education Fund
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=
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Capital Needed
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Capital Needed - Funds Available
at Death
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=
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Additional Life Insurance Needed
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