Add the following amounts:
|Mortgage or rent, and other home-related expenses. Include your monthly mortgage payment, with insurance and real estate taxes, or the amount paid for rent. Also include the amounts you spend monthly on home repairs-e.g., plumbers, contractors, electricians, appliance repair-and on home improvements. Add to this the amounts spent monthly on furniture, appliances, linens, and other items bought for the home||$___________|
|Heat, electricity, insurance (life, health, and liability) water, gas, trash collection, and other monthly bills||$___________|
|Food, including other items bought at grocery stores or drug stores, such as toothpaste, and including restaurant bills||$___________|
|Travel, including car payments, gas and oil, car repair, and car payments||$___________|
|Child care or other dependent care||$___________|
|Recreation, including travel, gifts, theater, cinema||$___________|
|Multiply by 12 and enter amount in Line 1 of the worksheet (below)||$___________|
Line 2: Subtract "Other Sources"
The next item on the worksheet represents the income that your survivors will have. If there are sources of income other than the ones listed, do not neglect to include them.
Tip: To calculate Social Security benefits, you may wish to obtain an estimate of your benefit from the Social Security Administration. You can obtain a request form by calling SSA's toll-free number-800-772-1213.
Since you cannot predict the amount your survivors will receive (it will depend on your age at death, your earnings, and the ages of your children), you may use the following as rough estimates: $4,000 per year if you have one child under 16, or $5,000 for two or more children under 16.
Do not include other insurance proceeds here; this will be accounted for later.
Line 3: Determine The "Shortfall"
Line 3 represents the shortfall, i.e., the amount you need your insurance proceeds to replace. This is determined by subtracting the "Annual Income From Other Sources" amount from the "Annual Income Needed."
Line 4: Determine the "Amount Of Proceeds Needed"
Line 4 is the amount that will generate the investment income needed to make up the annual "Shortfall" in Line 3.
The amount by which you should divide line represents the after-tax rate of return you can expect on the invested life insurance proceeds. The amount you choose to divide by depends on how conservative you want to be. It is reasonable for most people to expect an after-tax rate of return of at least 6%. But if you want to ensure that you are protected from inflation risk and interest rate risk, use the lower divisor of 4%. The middle divisor of 5% represents a "middle of the road" approach.
The amount you arrive at is the amount of death benefit (proceeds) you will need. The amount will be further adjusted as you work through the worksheet.
Line 5: Add the "Lump-Sum Expenses"
These are the items your family will have to pay for at the time of death. They differ from the "annual income needs" amounts in that they are not part of the family's everyday living expenses. Further, unlike the annual income amounts, they represent pure guesswork. If you wish to strive for a higher rate of accuracy, you can try to adjust these items for inflation, but this is not strictly necessary.
The estimate for funeral expenses should be at least $5,000. Depending on your desires and those of your family, you can adjust this figure upward.
The final medical expenses will be minimal if you have adequate health insurance. You can estimate this amount by finding out how much your policy requires you to contribute per illness.
The estate administration and probate costs can be estimated at 5% of your estate for the sake of simplicity. Your estate is the total value of your assets at death.
You will only owe federal estate taxes if your taxable estate exceeds the amount of the unified credit exemption equivalent. Your state inheritance taxes will depend on the laws in your state.
The "emergency living expenses" amount can range from three to six months' worth of family living expens