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Determining Life Insurance Needs the Easy Way

By JLP | December 21, 2005

I am currently previewing Jane Bryant Quinn’s newest book Smart and Simple Financial Strategies for Busy People that will be out in early January. She talks about a relatively simple formula offered by the Consumer Federation of America: Married couples with two small children need eight times their joint annual income to cover future living expenses for 20 years (nine times earnings for 30 years). One thing that is a bit confusing with her formula is that she breaks it down into two classes: lower wage earners only need 8 times current earnings while higher income levels might need 10 times earnings. What’s not clear is the distinction between lower and higher level incomes.

Anyway, here is the formula in her book for a family with one earner:


Annual Earnings

$60,000

Multiplied by:

X 8

Subtotal

$480,000

Add for college:

$100,000

Subtract company-provided insurance

- $60,000

Total life insurance needed:

$520,000

There you have it. It doesn’t get any simpler than that. Now I must caution you that just because it is simple doesn’t make it the best formula. Compare this formula to the formula I talked about yesterday. It might not hurt to run the math using both formulas so that you get a good idea of what you really need.

Topics: Financial Planning, Insurance | 4 Comments »


4 Responses to “Determining Life Insurance Needs the Easy Way”

  1. FMF Says:
    December 21st, 2005 at 10:40 am

    Do you think this formula is correct? Shouldn’t it be 8-10 times EXPENSES? For instance, we live on about 75% of our income — using the rest for savings and giving. Insurance is meant to cover the 75% my family would need, correct? So shouldn’t it be based on expenses rather than income.

    Then again, if you assume income = expenses (which it does for most people), the formula would work as is.

    Any preliminary comments on the book or will you do a review later? I’ll be reviewing it as well, so I’m sure I’ll like it if you hate it and vice versa. ;-)

  2. JLP Says:
    December 21st, 2005 at 10:57 am

    One advantage to doing it based on income is that if you are only living on 75% of your income, you are most likely saving the other 25%. Therefore, it might be wise to factor in savings in case you die prematurely.

  3. Denise Mancini-Blonda Says:
    March 25th, 2008 at 2:14 pm

    I would argue that it shouldn’t matter whether you are in a high income or low income family. If the breadwinner dies, no matter how much he/she makes, his/her income needs to be replaced. The way you should think about it is if I’m 30, I’d probably work at least 20 more years…how much would I make throughout my lifetime. That’s closer to the number that you need.

  4. Term Life Insurance Calculator Says:
    June 25th, 2008 at 2:08 pm

    I find it easier and more accurate to use one of those free tools online called a life insurance needs calculator that does all the figuring for you, after you answer some financial questions.

Comments