This calculator determines what initial lump sum/proceed payment (less any existing investment assets) is required to generate a specified income stream. For the sake of simplicity, the calculation does not consider the effects of taxes or inflation in the income stream/annual withdrawal. |
If what we have is not what we want then it would make sense that the next questions we need to answer is How Much Is Enough? Now we are back to our "wants" discussion. If one is buying life insurance to protect their income for their loved ones the first question will be to ask how much of your income do you want your family to have in the event you are no longer here? You will be surprised to hear than many will say I want to replace all my current income. I want my family to have what I earn in income today. To calculate that amount we will need to know how much money they have today that can offset the amount of insurance they will "need" to generate that amount of income. We also need to know the rate of return they expect to earn on their savings and investment dollars. Keep in mind that the rate of return will be a short term rate as opposed to a long term investment rate because the account much provide immediate income. With this information we will be able to estimate the amount of insurance they will "need" to accomplish what they "want" which is to give the opportunity for their heirs to continue to live like they live today at the same level of income. |
The problem is solved by determining how large a fund is needed to provide interest payments equal to the current income starting at time 0 (beginning of year 1). Fund Size = (Required Income / Investment ROR) - Accumulated Savings + Required Income |