How much life insurance do you need to protect your support order or alimony income?
Most people need just enough insurance to cover final expenses and to replace income that loved ones are dependent on. A useful rule of thumb that works on average for most people with stable incomes is to take your current annual income (actually, your after tax income plus all tax deferred contributions to health plans, pension or 401k plans, etc) and multiply it by the number of years until retirement, but no more than 20.
The reason this rule of thumb works so well is that the average income growth rate is very close to the average rate of return on safe investments (with both income and investment return adjusted for taxes and inflation). If you partition the life insurance proceeds into equal annual portions from now until retirement, each portion will grow to match the higher wages.
If this assumption is not applicable, then a rather more complex calculation is required. For this case, you would need to know the year by year numbers for income and investment return, adjusted for taxes and inflation. Since few people can predict with any certainty income growth rates and future investment returns, the rule of thumb is likely to be as good as a more complex calculation for most people with stable incomes.
There are a number of reasons for having more or less life insurance protection than our simple rule of thumb. If your retirement income does not continue for your spouse upon your death, you would clearly need more insurance. If you are a single parent, the ages of your children and their plans for college will determine the amount of insurance you need (not your projected retirement age). If you have children with special needs, they may be dependent on you long after age 18. If you wish to endow a charity or have estate tax liability, you would want additional life insurance.
But, to calculate the life insurance you need to protect your support order or alimony income, the quick rule of thumb is probably all you need.
How much life insurance do you need to protect your support order or alimony income?
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1.
What is the planned income from the support order
or alimony?
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150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 2100 2200 2300 2400 2500 2600 2700 2800 2900 3000 3100 3200 3300 3400 3500 3600 3700 3800 3900 4000 4100 4200 4300 4400 4500 4600 4700 4800 4900 5000 | Per Week Per Month | |
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2.
For how many years will the support order or alimony be in place?
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1 2 3 4 5 6 7 8 9 10 15 20 25 30 35 40 | ||
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3.
What CPI or other annual inflation factor (if any) is provided by the order?
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0 % 1 % 2 % 3 % 4 % 5 % | ||
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4.
What annual interest rate could you make on the invested life insurance
proceeds?
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3 % 4 % 5 % 6 % 7 % 8 % 9 % 10 % | ||
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5.
amount of life insurance required to replace the support order or alimony:
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$ |
