# How to Calculate the Life Insurance Needed by Survivors

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Calculating the life insurance needed by survivors requires you to follow a very specific series of steps. Calculate the life insurance needed by survivors with help from a licensed insurance agent in this free video clip.

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## Video Transcript

Hi, I'm Jonathan DeYoe, with DeYoe Wealth Management in Berkeley, California, and today we're gonna talk about how to calculate life insurance needed by survivors. So there's three pieces to this, and it's really helpful to have been, to have done some financial planning prior to trying to figure this out. The first piece is the easiest piece. It's simple burial costs. And the second piece is income replacement. And the third piece is, sometimes we put off planning for certain things. We may not save for our kid's education, maybe until they're eight or nine, so if something happens in the interim, we never get to that. So, the third piece is saving for unplanned for things. A variety of possibilities. So the first one, as we talked about, was the burial expenses. And just put simply, there's a wide range of the way people can take care of these final expenses. Generally they're gonna cost between four and say 12 thousand dollars. The second topic is probably the most important topic, to the extent that the deceased earned an income to support the family, that income needs to be replaced. Now I've seen this discussed in two different fashions. The first fashion is really sort of the minimalist fashion. It's, let's get enough insurance to replace this income for four or five years, this gives the family enough time to make the changes that will allow for a more permanent solution. So, as an example, let's pretend that the deceased income was 50 thousand dollars a year, we wanted to replace five years of that income, we would then look for a policy that, with a benefit amount of 250 thousand dollars. Now, when we talk about income replacement with our clients, we actually look for something a little bit bigger than this. What we want them to do is we want them to think about what happens to the family the long term. Not just replacing income for four or five years. We want them to think about this in the same kind of terms they would think about creating a retirement income that they can't outlive. In other words, if they are making that 50 thousand dollars, and they died when they were 40, we would want to build into the plan, or build into the insurance policy, enough income, or enough asset base, enough benefit amount, so that they would have an income stream equal to that 50 thousand dollars growing with the cost of living for the rest of their lives. So this requires a lot larger insurance policy to make it happen. Our rule of thumb is that the benefit amount, the amount of the insurance, should be able to replace the income lost, in this case that 50 thousand dollars, every year, growing with inflation, for the rest of the spouses or family remaining family's lives. Now, what this mean is, they need, and this is just rule of thumb, 20 times the amount of that income. So in the case of a 50 thousand dollar income that needs to be replaced, what they need is a million dollar life insurance policy to make this happen. So, what that means is a million dollars times a 5 percent withdrawal rate, which means they'll be spending five percent of those investments every single year, will give them a 50 thousand dollar income in that first year. Of course, there may be some moderating circumstances. In other words, they may not need the whole million dollars if the family already has some assets saved, perhaps in a retirement program, an IRAs or perhaps in their emergency fund. That would, if they had 100 thousand dollars saved, that means they would need 900 thousand dollar benefit, because they have that other money there and ready for them. Secondarily, they may also have access to social security. So just because somebody passes, doesn't mean their social security goes away, there may be survivor benefits. And so to the extent, they have other income sources, perhaps a pension that hasn't started yet, or as I said, social security, then that would go to reduce the ultimate benefit amount needed to fund for the insurance policy. Finally, if there are parts of the financial plan that have not been begun to be saved for, if we haven't tackled some elements yet, life insurance may be a way to get those things taken care of. Again, sometimes we approach our financial plans and all the different pieces that we're saving from serially, one after the other. And if there's things that we haven't yet begun to save for, this might be the way to make them happen. So when determining the final amount of the insurance, what you need to do is add up burial costs, the costs of the benefit of the insurance to replace income, and any of that future planning that you haven't tackled yet. Add them up, and that should give you a sum that you could have as a benefit amount for an insurance policy. I'm Jonathan DeYoe, with DeYoe Wealth Management in Berkeley, California. Thanks for listening.

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