Although there are several methods for determining an appropriate amount of life insurance, we favor a method known as Capital Needs Analysis. In essence, this method uses life insurance to supplement a person’s current net worth to create a pool of money which, when invested at a conservative rate of return, will generate a sufficient annual income for a family to live in the style to which they are accustomed.
This number should also be reviewed in light of what amount of insurance “feels right”. If a calculated amount of insurance seems to be too much or too little, it probably is.
Finally, of course, the cost of the insurance must be factored as well, remembering that an insurance policy is an annual expense.
In addition to providing income replacement, life insurance is also used to provide liquidity to pay estate taxes or to equalize an estate among multiple beneficiaries. The amount of insurance in these circumstances is a more complicated conversation weighing such factors as previous estate planning, anticipated future tax rates, the asset mix that comprises an estate and projected future asset growth rates. We are well equipped to handle these conversations and invite you to call our Life Insurance Department for a further discussion.