With this approach, the capital used for income replacement is left intact and the beneficiaries live off the income it produces.
To calculate, arrive at the annual income need, divide this figure by a conservative, after tax, rate of return that can be earned to arrive at a total for your income replacement fund.
- Optimally provides income stream indefinitely as the principal (death benefit) remains intact.
- Simple to calculate.
- If the rate of return is lower than the assumed rate, the beneficiaries could run out of money prematurely.
- The amount of money needed to fund income replacement typically is greater than other methods, as the beneficiaries are intended to live off of income only.
Using this method, the length of time that income needs to be replaced becomes a major factor in determining the capital needed for income replacement.
- Typically requires less money than the capital preservation method, as both principal and income are used.
- The length of time that the insured’s salary needs to be replaced is highly subjective. Requires all the factors mentioned in the worksheet, as well as an examination of human life value.
- More complex to calculate.