We’ve been asked many times for a condensed death benefit calculator that gives advisors and their clients a quick estimate of life insurance needs. I’ve streamlined an estimator to 8 entries, down from the usual 13 to 21 found in most online calculators:

1. Enter your client’s name (optional)
2. Enter client’s age
3. Enter client’s estimated age at retirement. This gives you the number of years of income replacement needed.
4. Enter rate of return on investments - Here you answer, “if you have the death benefit in a lump sum today, what long-term rate on investments do you assume?” You, as the advisor, will counsel the client and determine the correct input based on their risk tolerance.

Below this entry, I assume a long-term inflation rate of 3% for simplicity.

1. Next, enter client’s after-tax income. This is designed to replace the income your client actually lives on. Plus, death benefits are received tax-free, so you’re looking at an after-tax income stream to a tax-free death benefit for an “apples to apples” comparison.

I eliminated items found in many calculators:

• Mortgage and other debts –normally paid out of income, so no need to “double-count”
• College – assuming you’ll send all 8 kids to Yale if you die is OK, but if you can’t do that out of normal income, you can’t afford it
• Social Security Survivor benefits – it can be a small monthly payment, depending on the survivor’s age and children’s ages, it can come and go, and who knows what it will look like in 5 or 10 years, so we ignore it
• Surviving Spouse’s Income – if your client’s spouse is working, no doubt financial planning assumptions are using both incomes

Death benefit needed for income replacement is calculated based on the above input.

Next you’ll enter:

6&7. Other life insurance in force

8. Any liquid non-retirement assets readily available

Additional life insurance needs (in the form of Term life insurance) for income replacement is calculated for you.

I don’t consider retirement account assets to reduce the amount of life insurance necessary here for two reasons:

• For young people, the penalties to access the assets in retirement accounts can be high
• These are assets that are allocated to retirement, so they shouldn’t be allocated against pre-retirement income

Final expense needs.

Because I am a proponent of permanent life insurance for most clients, that is what this field represents. This is additional life insurance that wouldn’t be covered under income replacement (so can’t be covered by term), and coverage that most people want to have at the end of life, whenever that is. This is where your entry for Existing Whole life or Universal life factors in.

At LLIS, we believe most clients desire some life insurance at death to cover things like funeral expenses and final medical bills, and to provide their survivors with a “cash cushion” for living expenses, removing the need to make important financial decisions during this stressful time. So the Final expense needs calculation is based upon compounding $50,000 for final expenses in today’s dollars to age 85 (the generally accepted life expectancy), when the client is likely to need this additional benefit.

Mark Maurer, CFP^®, President & CEO

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