The idea in one sentence
If a lump sum earns interest while your family draws a yearly income from it, how big must that lump sum be so it lasts exactly as long as you want? That is a present value calculation, and it usually produces a smaller number than simply multiplying income by years, because the unspent money keeps earning.
The formula
Lump sum = yearly income needed x (1 - (1 + r) ^ -years) / r
The yearly income is your salary multiplied by the percentage you want to replace. Many households replace 60 to 80 percent, because some of your costs, such as commuting and retirement savings, disappear. If you enter a return of 0, the tool falls back to income times years.
Worked example
Someone earning $75,000 who wants 70 percent replaced for 15 years needs $52,500 a year. At an expected return of 4 percent the lump sum is about $583,715, compared with $787,500 paid out in total. The difference is the interest the money earns while it is being spent.
Choosing a realistic return
Use a cautious figure. A payout invested conservatively might earn 3 to 5 percent, but returns are not guaranteed and inflation erodes purchasing power. Entering a lower return gives a larger, safer lump sum. If you expect your family to invest more aggressively, remember that markets can fall just when money is needed.
How this differs from the needs calculator
The Life Insurance Needs Calculator adds up all obligations and does not discount for investment growth, which makes it more conservative. This calculator isolates the income piece and shows the effect of growth. Using both gives you a range: a lower bound from the discounted method and an upper bound from the simple one.
Checklist before you rely on it
- Include only the income your family would actually miss.
- Consider a surviving spouse's earnings and any survivor benefits.
- Account for inflation by lowering the return or raising the yearly amount.
- Decide whether you want the money to run out or to leave something behind.
When you are ready to price the result, move on to the Life Insurance Premium Estimator or read our guide on sizing a policy.
Frequently asked questions
What percentage of income should I replace?
Between 60 and 80 percent is common, because some of your spending ends if you are no longer alive.
Why is the lump sum lower than income times years?
Because the unspent balance earns interest while the family draws income from it.
Should I use a high return?
No. A conservative rate protects against falling markets and inflation.
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Edited and checked by Talha Shah. Last reviewed 2026-10-17.