Practical guide · stated assumptions and checkable examples
Life insurance needs: model the funding gap instead of an income multiple
Published · Sources checked
Source and worked-example review; not professional advice or approval. Examples are synthetic unless explicitly identified otherwise. Follow the cited authority for current eligibility and legal requirements.
A single multiple of annual salary hides the questions that matter to a household: which costs need funding, for how long, and which reliable resources are already available? A needs worksheet makes those choices visible without deciding which policy someone should buy.
Set the scope of the household scenario
NAIC describes term insurance as coverage for a specified period and distinguishes it from forms of permanent insurance. The worksheet estimates a funding gap; it does not price a policy, assess underwriting or determine whether an existing contract should be replaced. Keep the amount of cover and its intended duration as separate questions.
References: NAIC — Life insurance
A checkable needs calculation
Assume a 200,000 debt balance to be covered, 40,000 for a specific future expense and 30,000 per year of replacement support for 15 years. Using simple undiscounted support, total modeled need is 200,000 + 40,000 + 450,000 = 690,000. Deduct 100,000 of explicitly available assets and 250,000 of existing cover to obtain a 340,000 gap. These are synthetic household inputs, not recommended coverage levels.
Calculation: Gap = max(0, obligations + future needs + modeled support − available resources − existing applicable cover)
Do not count the same resource twice
An asset reserved for a different obligation should not also be deducted as freely available support. Similarly, paying off a debt may change future support costs; including full debt repayment and an unchanged payment inside annual support can double-count that expense. Document whether each item is a one-off amount or a recurring cash flow before adding it.
Duration deserves its own sensitivity test
Reducing the synthetic support period from 15 to 10 years lowers that component from 450,000 to 300,000 and the gap from 340,000 to 190,000, with everything else unchanged. A discounted present-value model would require an explicit discount-rate assumption and timing of payments. It should not quietly replace an undiscounted calculation without explaining the change.
Take the assumptions to a qualified conversation
NAIC’s consumer guidance highlights dependants, obligations and existing resources when considering needs. Verify which existing benefits would actually be available and when. This calculator does not confirm tax treatment, benefits entitlement, beneficiaries, exclusions, affordability or portability of workplace cover. It helps organize the questions; it does not resolve them.
References: NAIC — Questions when purchasing life insurance
Questions about this guide
Is ten times salary the calculator’s recommendation?
No. The model uses entered obligations, support and resources. A multiple alone cannot explain which needs have been included.
Does a zero gap mean no insurance is needed?
Not necessarily. It means entered resources meet entered needs in this particular model. Missing obligations, timing restrictions or unavailable resources can change the result.
Primary sources and reference dates
- NAIC — Life insurance — checked .
- NAIC — Questions when purchasing life insurance — checked .