Using the Insurance Calculator
Choosing the right life insurance policy is one of the most critical financial decisions you will ever make. Our insurance calculator is designed to help you strip away the guesswork and determine exactly how much coverage is necessary to protect your family's future. By entering a few key financial metrics, you can see a realistic estimate of the death benefit required to settle your debts and provide ongoing support for your loved ones.
This tool accounts for the "DIME" method of insurance planning—Debt, Income, Mortgage, and Education—while also factoring in your existing assets to ensure you aren't over-insured and paying higher premiums than necessary.
- Annual Income
- The gross yearly salary you currently earn. This is the amount your family would lose if you were no longer able to provide.
- Years of Replacement
- The number of years you want your family to be supported. Common choices include until children reach age 18 or until a spouse reaches retirement age.
- Total Debt
- Includes your mortgage balance, car loans, credit card balances, and any other outstanding liabilities.
- Existing Assets
- Current cash savings, investment accounts, or existing life insurance policies that would help offset the financial burden.
How It Works: The Calculation Formula
When you use an insurance calculator, it applies a simple but powerful subtraction-based formula to determine your "Gap." The gap is the difference between what your family will need and what they currently have. The primary formula used is:
Life Insurance Need = (Income × Years) + Total Debts + Final Expenses - Existing Assets
- Income Replacement: Multiplies your current salary to ensure your family's lifestyle remains unchanged.
- Debt Liquidation: Ensures that big-ticket items like the family home are paid off immediately.
- Final Expenses: Covers funeral costs, which can average between $7,000 and $15,000.
- Asset Deduction: Reduces the required coverage by what you already own to lower your premium costs.
Calculation Example
Scenario: Meet John, a 35-year-old earning $75,000 a year. He has a $250,000 mortgage and wants to ensure his family is covered for 15 years. He has $25,000 in savings.
Step-by-step solution:
- Income Replacement: $75,000 × 15 years = $1,125,000
- Add Debts: $1,125,000 + $250,000 (Mortgage) = $1,375,000
- Add Final Expenses: $1,375,000 + $10,000 = $1,385,000
- Subtract Assets: $1,385,000 - $25,000 = $1,360,000
- Final Result: John needs a life insurance policy with a death benefit of $1,360,000.
Common Questions
How many years of income should I replace?
Most financial experts recommend replacing between 7 to 10 times your annual income. However, if you have very young children or a stay-at-home spouse, you may want to increase this to 15 or 20 years to ensure coverage lasts until the children are financially independent.
Does this calculator work for Term or Whole Life insurance?
The needs calculation applies to both. Once you know the amount (e.g., $1 million), you can choose to fulfill that need with Term insurance (lower cost, expires after a set period) or Whole Life insurance (permanent coverage with a cash value component). Most users of an insurance calculator find Term insurance to be the most cost-effective way to cover high-need years.
Should I include my spouse's income?
You should calculate each partner's needs separately. If both partners contribute to the household income, both likely require coverage. Even for non-working spouses, insurance is important to cover the costs of childcare and household management that would otherwise require hired help.