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 Needs Calculator Help

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

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.

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

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  Income will be distributed or withdrawn from this insurance fund for a specified number of years and, at the end of the distribution period, the insurance fund will equal zero.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%). 

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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Children's Education Fund

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%. 

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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Funds Available at Death

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.

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

Immediate Cash Needs + Income Replacement +  College Education Fund

=

Capital Needed

Capital Needed - Funds Available at Death

=

Additional Life Insurance Needed

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