Life Insurance Needs Calculator

How the Income Replacement Method Works

This calculator uses the income replacement method, one of two standard approaches financial planners use to estimate life insurance needs (the other being the DIME method, available separately below). The core idea: your family relies on a percentage of your income to maintain their lifestyle, so your policy should be large enough that, invested conservatively, it can generate that same income stream for as many years as your family needs it — typically until the youngest child is financially independent or you would have retired.

The calculator converts your income need into a present value using your expected investment return, then adds fixed lump-sum needs (mortgage payoff, other debts, funeral costs, education funding) that a policy also needs to cover on day one. It subtracts what you already have — existing coverage, liquid savings, and employer group insurance — to arrive at the additional coverage gap you should consider closing.

• Why 80% and not 100%? The 80% default reflects that a surviving family typically has somewhat lower expenses than the working earner (no commuting costs, no retirement contributions from that income, etc.) — 100% is more conservative and appropriate if you want a larger cushion.
• Why does the investment return assumption matter so much? A higher assumed return means a smaller lump sum can generate the same annual income, which lowers your calculated need — but assuming too high a return risks leaving your family short if actual returns come in lower. 4-6% is considered a conservative, defensible assumption for this kind of planning.
• Employer coverage is subtracted but flagged. The calculator counts employer group coverage toward your resources, but remember it's typically not portable — see the coverage gap analyzer to model your coverage picture with and without it.