Determining how much life insurance to buy

Online life insurance calculators, like the one offered by Bankrate, ask how much survivors will need to spend annually, and for how long. The Bankrate calculator also asks about children and current non-retirement savings. 

For the example of a 45-year-old married physician with two children, the calculator recommended securing policies totaling $2.6 million to provide $150,000 in after-tax annual income to a family for 20 years until retirement. That figure includes a large fudge factor for unexpected costs: a one-time event costing $500,000. With only $50,000 plugged in for a one-time event such as a wedding or new car, the recommendation drops to $2.2 million.

If you use such a calculator, be sure to include all the assumptions. In the example above, for instance, the surviving spouse would need to continue funding retirement accounts out of the $150,000 income in order to have a retirement nest egg ready once the insurance money is exhausted.

Altering the scenario, consider a dual-physician household with similar-aged children, where one spouse earns $225,000 and the other makes $140,000 a year. In the event of the death of a spouse, the lower-earning spouse decides to cut back at work to focus on the children, so the household income drops from $365,000 to $90,000. And they’ll need the insurance money to cover the surviving spouse’s retirement, through age 90. The Bankrate calculator estimates the insurance need at more than $6 million.

What will all this cost in annual premiums? A 45-year-old Wisconsin male classified in the second-highest health rating would spend between $3,185 and $4,375 for term insurance with a $2.5 million death benefit, according to a range provided by www.term4sale.com. For a $6 million death benefit, the range was $7,525 to $10,405.

Here is one scenario we ran through Bankrate (bit.ly/life-insurance-calc). Remember it is only one scenario, and your needs will vary.

Q

How much money will you need for burial expenses (suggestion: $8,000-$10,000)?

$10,000

Q
For how many years will your income need to be replaced?

20

Q
How much annual net income (after tax) will survivors need?

$150,000

Q
Any children who will go to college?

Yes, 2

Q How much is needed per child? 

$100,000

Q What are their current ages? 

17,14

Q
Any 1-time expenses, such as weddings, cars, etc?

$500,000

Q How many years from now?

10

Q
How much liquid savings do you have, aside from retirement?

$200,000

Recommendation:

$2.5 million

Q What will it cost? 

Annual costs on $2.5 million in term life insurance: $3,185 - $4,375, according to life insurance quoting site term4sale.com.

(Range of 50 carriers providing quotes for a non-smoking, 45-year-old male applicant with second-best health rating.)