Determining Capitalized Value
Capitalized Value is a "quick and dirty" way to estimate the amount of life insurance required. It consists of several simple steps: determine the average annual salary that needs to be replaced and the total amount of all (one-time) expenses that are to be paid off at death. These may include funeral expenses, mortgage on the house, credit cards or other debt as well as any expenses involved in settling the estate (such as probate fees). Then, estimate the real interest rate by subtracting the expected rate of inflation from the anticipated rate of return. Once these amounts have been determined, the calculation is very simple. (Please use gross amounts [i.e. "before taxes"] for these calculations.)