How do you determine insurance needs with an income replacement approach?

• A. Evaluate current debts and final expenses to determine coverage needs.
• B. Estimate annual income to replace, subtract other income sources, multiply by years of dependency, account for taxes and expenses, compare to existing coverage.
• C. Use a fixed rule of thumb independent of personal circumstances.
• D. Base coverage only on debt outstanding.

Answer: (B)

The main concept is estimating how much life insurance is needed to replace the income that would be lost if the primary breadwinner dies. Start by figuring the annual amount that would be required to maintain the family’s standard of living. Then subtract other sources of income that would still be available, such as a surviving spouse’s earnings, Social Security survivor benefits, or any other ongoing income. Next, multiply that annual shortfall by the number of years dependents would rely on that income (the years of dependency). Make sure to account for taxes and ongoing expenses, and consider how expenses might change over time due to inflation or life changes. Finally, compare this total to the household’s existing coverage to determine whether more protection is needed or if current coverage is sufficient.

This approach directly focuses on sustaining finances for dependents, rather than just paying off debts or following a one-size-fits-all rule. It avoids under- or over-insuring by tailoring the need to the family's actual income needs, other income sources, and how long that income is needed.