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 expenses.
The "debts" amount represents debts that your family desires to pay off at your death. Normally, it does not include items that make up the "annual living expenses"-e.g., mortgage payments, car payments. However, if you decide that you wish to use insurance proceeds to pay off such expenses, then add in the amounts you estimate will be needed to pay off such debts.
As for future education expenses, it is suggested that you use an annual cost of $20,000 per child, per year, for the sake of simplicity.
Line 6: Determine the "Interim Insurance Proceeds Amount"
Subtract the "future expenses" on line 5 from the "proceeds needed" amount on line 4. This is the amount of insurance you will need to buy on your life. The amount will be further adjusted.
Line 7: Subtract the "Assets That Can Be Sold and Other Insurance"
For line 7, determine the amounts that represent assets that your survivors could liquidate to pay future expenses. Do not include any assets your survivors will be using to produce income that you included in "other sources." Also, note that you should include insurance payments and pension death benefits here, and not on the line for "other sources." This is because such proceeds will represent one-time payments, and not sources of annual income.
Line 8: Determine the "Total Insurance Needed"
Subtract the "assets that can be sold and other insurance" on line 7 from the interim insurance proceeds amount" on line 6. This is an estimate of the amount of insurance coverage you need.
Life Insurance Worksheet
|1. Annual income needed.||$_____________|
|2. Subtract other annual income sources:|
|Salary of surviving spouse and other family||$_____________|
Estimated earnings on investments
|Total other annual income sources||$_____________|
|3. Subtract total of line 2 items from line 1||$_____________|
|4. Amount of proceeds needed (divide line 3 by 4%, 5%, or 6%)||$_____________|
|5. Lump-sum expenses:|
Final medical costs
Estate administration and probate costs
Federal estate and state inheritance tax
Emerg