How much life insurance do I need?

Insurance needed

For

years

For all expenses listed below

Assets to cover expenses

Cash and savings

Home equity

Investments

Other

Expenses at death

Estate or inheritance taxes (on above assets)

Probate costs

Funeral costs

Uninsured medical costs

Debt repayment

College fund, child 1

College fund, child 2

College fund, child 3

Your family's future monthly income

		Amount (monthly)			Years until start			Duration (years)

Spouse's income from work

Social Security survivor benefits

Social Security survivor benefits (children gone)

Other

Your family's future monthly expenses (in today's dollars)

		Amount (monthly)			Years until start			Duration (years)

Child care expenses

Living expenses (children at home)

Living expenses (children gone)

Children's college expenses

Retraining or education for spouse

Other

Other Information

Inflation rate

Your savings interest rate

Your state + federal tax rate

Your Sex

Male

Female

"How much life insurance do I need?" calculates how much life insurance coverage your family may need to cover future expenses in the event of your untimely death.

A life insurance policy is used to supplement income that your family may earn from:

Nonrecurring events, such as the sale of assets to pay outstanding debts or expenses.
Income from Social Security, pensions, investments, or salaries.

The following steps will help you find out the amount of policy coverage you need:

Estimate one-time expenses. These include your funeral and probate costs, child education funds or trust accounts, and debts.
Estimate your family's future income. When would they need this income? How long must it last? How much will it grow?
Estimate your family's future expenses. When will they be incurred? How fast will they grow? How long will they last?
Estimate major life events for your family members. What is your spouse's life expectancy? When will your children enter the workforce?
Estimate other factors. What is the rate of return on investments? What about inflation?

Based on these considerations, select how many years you desire life insurance coverage, or select a policy that is expected to cover only the one-time expenses that arise from your death.

"How much life insurance do I need?" shows three graphs:

A pie chart showing the composition of revenue to your family earned from future income, sales of assets, or insurance.
Growth rate of your family's future expenses, unadjusted and adjusted for inflation.
Policy amount needed to cover your family's future expenses for a variable number of years.

Estate taxes:Estate taxes are levied on the assets of an estate. For 2012, the maximum amount of income that is excluded from estate taxes is $5.12 million. The maximum estate and gift tax rate in 2012 is 35%. The maximum gift tax rate in 2012 is also 35%.

Tax rates:The Economic Growth and Tax Relief Reconciliation Act of 2001 cut individual income tax rates for all brackets except the 15% rate. A sixth tax bracket of 10% was also added for the first $6,000 ($8,700 in 2012) of income for single taxpayers, $10,000 ($12,400 in 2012) for single parents and $12,000 ($17,400 in 2012) for married taxpayers. For 2012, the six income tax rates are 10%, 15%, 25%, 28%, 33% and 35%.

Inflation rate:The inflation rate is the yearly percentage change in inflation. Inflation is an increase in prices. The annual inflation rate in the U.S. has averaged about 3% in the last 10 years. For example, a basket of goods that costs $103 this year and only $100 last year experienced an annual inflation rate of 3%.

Probate:Probate is a legal procedure settled by a state court of law that identifies the heirs to your estate and determines their legally entitled share. Probate is time consuming and expensive with costs often ranging between 6 and 10 percent of the value of your estate, according to the National Association of Financial & Estate Planning.

College savings plan:Together with prepaid tuition plans, college savings plans are a qualified state tuition plan (QSTP) that is regulated by Section 529 of the tax code. These two types of plans are also called Section 529 plans. As a result of the 2001 tax cut, withdrawals used for qualified expenses are exempt from federal taxes. Depending on the plan, contributions or withdrawals may be deductible for state income taxes. College savings plans invest in a professionally managed mutual fund or group of funds. You can save well over $100,000 for most college savings plans. Since states have some discretion in setting up tax rules, contribution limits, and management fees, you should read the terms and conditions of the state plan you are considering.

Survivors insurance:Social Security survivors insurance pays an additional benefit to the surviving spouse or dependent of a deceased person who was eligible to receive or receiving Social Security retirement benefits. This additional benefit is called a survivors benefit.

Savings interest rate:The savings interest rate is the yearly interest rate you earn on your savings. It is also used to calculate the opportunity cost of paying with cash. In contrast, the saving rate is the percentage of income you save.