“It is not only for what we do that we are held responsible, but also for what we do not do.”
There are any number of ways to calculate how much life insurance (we’re talking straight term insurance here) you might need, however I tend to use two that provide an upper and lower bound. In this post, we will discuss the upper bound and next week we will look at the lower.
When someone passes away there is not only a great emotional loss for those that remain but there may also be a considerable financial burden. One way to allay that burden is to buy life insurance in an amount that would replace the expected income from that individual.
Simply taking future projected earnings to retirement – or perhaps just to the point the funds are needed by dependents – and bringing them back to a present value gives us a good indication of the maximum life insurance need.
Essentially, we will replace the income that person is expected to provide through their lifetime.
A key to this analysis is the present value calculation which should be done assuming the funds received will be invested in a portfolio strategy of appropriate risk.
If you have any questions about this article, please email me at email@example.com. I look forward to hearing from you!