How Long Will The Proceeds Last?

This tool calculates how long (in years) the proceeds from an insurance settlement will last.  It may also be used to calculate how long ANY lump sum would last. It calculates the life of the proceeds from an insurance settlement (a lump sum) based on the following inputs:

•The amount of the proceeds or lump sum.

•Existing liquid/investment assets (if any).

•The investment rate of return on the lump sum (and existing assets, if any).

•The annual withdrawal needed by the surviving spouse (or for whatever).

•The inflation rate.  The expenses (annual withdrawals) are increased by this factor each year.

The difference between the investment rate of return and the inflation rate significantly impacts the life of a lump sum:

•Increasing inflation decreases the life.

•Decreasing inflation increases the life.

•Increasing investment rate of return increases the life.

•Decreasing investment rate of return decreases the life.

The first question to ask is How long will the proceeds last? Life insurance is designed to help one replace the assets or income stream lost from premature death.  To determine how much insurance someone would want the first step would be to find out what they currently have and determine if what they have is want they want.

We first need to know how much coverage they currently have in place.  Then the amount of capital they have in savings and investments.  We then need to determine the rate of return that the combination of the life insurance proceeds and their savings and investments will earn on an annual basis. We then must determine the income required and the impact inflation will have on those dollars being withdrawn from the pool of resources.

This calculation will give us the number of years the invested dollars will potentially last.

Once the client sees that number they can easily determine if the amount of coverage they have is the amount they want.  This is the first step in helping someone determine the amount of coverage they want.  If what they have will not accomplish what they want the price they paid to have it is meaningless.  Why would one pay for anything that will not accomplish the reason for which they bought it.

The calculation is performed in a worksheet defined as follows:

Column 1: Year

Column 2: Investment (sum of existing assets and lump sum proceeds) balance at the beginning of the year - before withdrawals.

Column 3: Annual withdrawal for the year.  It occurs at the beginning of each year.  It is adjusted for inflation each year.  For example, if the first year’s withdrawal is $25,000 and inflation is 4%; the next years withdrawal will be 1.04 X $25,000 = $26,000.

Column 4: Investment balance at beginning of year after withdrawal (column 2 - column 3).

Column 5: This is the interest earned during the year.  It is simply the investment rate of return times the beginning balance each year (column 4 * Inv. ROR).

Column 6: Balance at the end of year. It is the balance at the beginning of the year plus the interest earned during the year (column 4 + column 5).

Each year the program checks the ending balance to see if the lump sum is depleted, if it is, it stops and reports the year (in which the fund was depleted).