1) Determine the “reduced” monthly budget of the family excluding the mortgage payment and any amount that the family invests or saves to pay for children’s college. Assume it is $8,000. Multiply this by 12 to obtain the reduced annual family budget, or $96,000.

2) Let us assume that when the insured dies the family expenses are reduced by 20%. The reduced after-death annual family budget is $96,000 X (1 – 0.20) or $96,000 X 0.80, or $76,800.

3) Let us assume that the spouse annual salary is $26,800. The adjusted reduced after-death annual family budget shortfall is $76,800 - $26,800, or $50,000.

4) Let us assume that the surviving spouse is going to invest the death benefit proceeds in an account that earns an annual rate of return of 5% and the family is going to use only the interest generated by this account. The death benefit necessary to cover the adjusted reduced after-death annual family budget shortfall is $50,000 / 0.05, or $1,000,000.

5) If the insured already has other life insurance with a death benefit of, let’s say $300,000, the additional amount of necessary insurance (not counting mortgage, college education and final expenses) is $1,000,000 - $300,000, or $700,000.

6) Let us assume that the amount necessary to pay off the mortgage is $300,000, the amount necessary to pay the children’s college is $200,000 and the estimated final expenses are $50,000. The total amount of life insurance needed is $700,000 + $300,000 + $200,000 + $50,000, or $1,250,000.

7) If the insured cannot afford to pay for the $1,250,000 in universal life permanent insurance he or she should buy term insurance for those events that have a limited time duration like payment of the mortgage and college funding, or $300,000 + $200,000, or $500,000 in term insurance and the rest, or $750,000 in universal life permanent insurance.

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