 Personal finance practice problem using OneNote. Simple life insurance calculation. Prepare to get financially fit by practicing personal finance. You're not required to, but if you have access to OneNote, would like to follow along. We're in the icon left-hand side, practice problem tab in the 10010 simple life insurance calculation tab. Also take a look at the immersive reader tool. The practice problems typically in the text area too, same name, same number, but with transcripts. Transcripts that can be translated into multiple languages either listened to or read in them. Information up top, we're going to be looking at how much life insurance would be needed. Noting that we're typically looking at term life insurance to start with because that's the pure type of life insurance. In prior presentations, we looked at some online calculators. These often provided by insurance companies online on their websites. And we noted that we had different inputs for the different online calculators and often a different result, which is not really unusual or is to be expected to some degree given the fact that we can approach the question, how much life insurance do we need from different angles. We can customize it to different degrees. We can make it more or less complex, trying to make it more complex to an individual situation or less complex basically using heuristics. So it would be good to use these tools possibly as a guide to see if we're in the bull park but also possibly have an understanding of what tools they are using so we can customize our own calculation and get an idea that we feel comfortable with and approach we feel comfortable with. So we'll start off, we'll do different calculations. We'll start off with some kind of simpler calculations and then we'll put some of these tools together to do more complex calculations in future presentations. So we're trying to determine how much life insurance we need. One approach would say, let's just start with the salary that we have. So let's say we have the salary, if we were to die, we have people that are dependent upon our salary. So we can just use that as a baseline and try to use kind of some heuristics to see what would be a appropriate amount of insurance. So if we start with the salary and note you can use similar methods not starting with the salary but possibly starting with your expenses, right? The expenses that are needed as the baseline or probably compare between the two of them because hopefully the salary is greater than the cash flow needs, for example, on a yearly basis. So you can try to determine between the two. But we'll start with the salary here. We're then going to multiply it by the number of years that someone might need that money for. Now, there's many different ways we can come up with this number of years. You might basically just have a heuristic. You might just use, I've seen seven or 10 as kind of just an average saying, well, if someone dies, it takes seven to 10 years to basically get back in alignment or get back into an adjustment. So you could just use that as a generic number. Or you might say that the 10 years you could calculate it as how many years, for example, until I reach retirement and use a number such as that. Or you might say, if I have a children, I might look at my youngest child and say how many years until that child is 18 at which point you would think that if there's a spouse might be able to be freed up to earn revenue after that point in time and use that, or use that as part of a more complex calculation and then think about other needs such as tuition for college or something like retirement for a spouse or something like that over and above that amount. You might also use your spouse's age and how long it would take for them to reach retirement, for example, as the number here or possibly at least as a starting point to a more complex calculation taken into consideration other factors such as tuition for kids college or something like that in retirement. So that's going to give us the subtotal of 730,000. So we could say, okay, if they need 73,000 per year for 10 years we could just say we're going to take these 730,000. Now if they got that in, of course, a lump sum at the point of death you could imagine different calculations because you could imagine, well, they could invest the 730,000 and if they need like 73,000 per year you could figure kind of calculations in terms of how much they would need in a lump sum at the point of death in order to get 73,000 per year, but that's going to be kind of a, this is kind of like a heuristic type of simplified kind of approach. We'll get into some more complex approaches later. You can also argue again expenses up top and then try to feel like how many years they need for the expenses as another calculation. Also note that if you calculate this number 10 as the number of years until like a child reaches age 18 or that you would hit retirement each year that goes by you would be getting closer to that point, to that date. So that's why oftentimes you might want an insurance company that's a term insurance policy that declines over time because you would think you would need less insurance as people are less dependent upon you as you continue to live because hopefully you're going to be doing things like paying down the mortgage your kids are going to grow up and be self-sufficient and so on and so forth from that point forward. So we'll talk more about some of those complexities in future presentations. Now oftentimes you might say well the 730, that also includes my expenses because my expenses are going to be included in here which if I'm dead won't be there anymore. So you might say use some kind of again a heuristic kind of term which is often say 70% of that because one I won't be around so we won't have those expenses and two because this 730,000 they will be able to invest hopefully and hopefully get some return on it so that they can get the sufficient annual income to cover whatever costs they can do so we could use again 70% we just made up a 70% as a general kind of number and then we would come up to 511,000 with this calculation. So this is a very simplified kind of heuristic driven calculation based on the earnings method and you can do similar methods like I say with expenses you can do different things with the number of years that you're going to have and you could use this basically as a starting point to kind of a more complex method so we'll use this kind of as a tool or jumping point to look at some other methods in future presentations.