How does the Annuity Method determine the amount of insurance needed?

The Annuity Method for determining the amount of insurance needed focuses on ensuring that a family can maintain its standard of living after the loss of the primary income earner. This approach emphasizes the need to purchase enough life insurance to generate an income that can support the family indefinitely without dipping into the principal amount.

Essentially, this method calculates an amount that would allow the family to receive a constant annual payout (like an annuity) from the investment of the insurance proceeds. This ensures they can cover living expenses without depleting the initial sum. By using this method, one accounts for the long-term financial needs of the family, focusing on the continuous flow of income rather than a one-time payment or short-term solution.

This method is particularly useful because it reflects the goal of providing ongoing financial support, which aligns with the purpose of life insurance: to protect dependents’ financial stability over time.