14 Dec What’s your life worth — financially?

Q. What’s the best way to figure out how much life insurance I need? I’m married with two kids — 14 and 7 — and we have a house with a mortgage of $215,000. My salary is $79,000 a year and my wife makes between $15,000 and $25,000 a year.
— Not ready to go

A. There are many ways to figure out how much life insurance is appropriate.

One way is using the “human life value” approach.

“From a purely economical standpoint, if you died, your family would lose your earnings over your expected working days, which would have likely increased each year,” said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

Here’s how you do that.

Take your current income and calculate a future value, say, at an annual 4 percent increase over those expected working years, Gaelick said. Then take that number and put it into a present value, which would be the amount of insurance that would replace your economic value to your family.

“Of course you are a cost while alive so that number can be reduced some,” Gaelick said.

Vicky Tomaro, an Investment Advisor Representative with Tomaro Financial Group in Wall, takes a somewhat different approach.

She said you first need to calculate your monthly expenses.

“Keep in mind some monthly expenses will decrease after a spouse is gone – for example, perhaps you don’t need a second car,” she said.

Then consider if both of your incomes are required to pay those expenses, or if one income covers it all.

Then you need to think about some big ticket items, such as whether or not you plan to pay for college educations, or if you’d want your mortgage to be paid off if you were on your own, Tomaro said.

If you lose a spouse, you may have some new expenses, such as child care or after school care. Make sure to add those costs.

Also note that if something happens to a spouse, you will receive survivor benefits from Social Security, Tomaro said. There are also survivor benefits for the children for limited period of time, which are received until both are 18 years old and graduated from high school.

After factoring in these benefits, how much do you need to supplement in order to pay your monthly expenses?

This is where your calculation gets a little more complex.

“If you calculate you’ll need $1.8 million to cover your expenses for the future, you don’t need $1.8 million worth of life insurance,” Tomaro said.

That’s because you’re not looking to receive enough principal to withdraw over time, but rather, you need enough that you can invest and draw income off of the funds to help cover your monthly expenditures.

An insurance professional or a financial advisor can help you make the calculations.

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This story was first posted in December 2015.