Example of Self- Insurance Need Calculation

Sample of case study:

Sam is 40 years old family man. if Sam were to die today, it is estimated that final expenses would be $20,000, $10,000 for the mortgage payment, $10,000, $4,000 and $10,000 would be  required to pay off other debts, taxes and loan respectively. based on the current cost for a private college, it is assumed that $75,000 would be required today to fund Sam’s 12 year old son college. Finally, Sam would like to set up an emergency fund of $25,000 in the event he dies.

Based on his family’s current lifestyle, Sam estimates that his wife would need $3,500 per month after tax in current dollars to maintain her standard living if Sam died. Assuming available assets could be invested at an average annual after -tax return is 3%. Sam’s wife, who is 40 0year old and expect to life up to 85 years old.

$1,000per month is required to maintain Sam’s son current standard of living and until he is graduating from the college.

Finally, an additional income of $1,000per month would like to be provided by Sam for two year to help the family through the adjustment period in the event he dies. Currently, Sam is having $200,000 of life insurance policy, cash in saving $25,000, investment assets $200,000, social security $100,000, pension benefit $50,000, and other capital $25,000.

Calculating the total insurance needs of Sam family in the event he dies.

Sample of total insurance needs analysis worksheet:

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Sample of calculation by using financial calculator:

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The total insurance needs analysis worksheet showed in Table has been computed based on the data and information that I collected from Sam and his family. From the data gathered, it showed that Sam is a responsible father as well as a husband. His priority is to ensure that his wife who is 40 years old currently and a 12 year old kid will be taken care of by providing a sufficient amount of income to sustain the current living standards of the family and to ensure his child have enough funds to go through up to university level while free from any debts.

Based on the Table above, it showed that the total current cash need by Sam is up to RM244, 000 in case he was dying today. This amount including RM100, 000 of the mortgage payments, RM4, 000 of taxes, RM10,000 of others debts and loans respectively, RM20,000 of his final expenses, RM25,000 of emergency funds and RM75,000 for his kid education fund.

Besides that, it is estimated that the total living expenses needed by his wife is amounting up to RM1,060,680. Since his wife still able to generate about RM250,749 along his way, therefore the total income needed to maintain her current living standards will be RM809,931 (RM1,060,680 – RM250,749). The income for his son is expected to be RM 123,031 until he graduated from college. And, RM23,650 is needed for his family during the adjustment period in the event he dies. Thus, the total capital needs by his family are up to RM956,612.

Other than that, the resources available by Sam are amounting up to RM600,00. The liquid assets are estimated amounting up to RM25,000 from his cash and savings, RM200,000 from his investment assets, RM100,000 of social security and RM50,000 of pension benefits. Meanwhile, he also bought a life insurance which entities him to the sum assured of RM200,000 and also some other capital which is amounting to RM25,000.

However, after conducting the insurance needs analysis for Sam and his family there is a shortfall of RM600,612 (RM1,200,612 – RM600,000), which is the additional life insurance coverage requirement.

 

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