Part of our guide to What Insurance Do You Actually Need? A Plain Guide to Each Type
Most people arrive at a life insurance figure by picking a round number or by multiplying salary. Both are guesses. The amount is actually calculable, and doing it takes about ten minutes.
Add up what would have to be paid off, plus what income would need replacing and for how long, plus costs that arrive because you are gone. Subtract what your household already has. The remainder is what the policy is for.
The four-part calculation
1. Debts that would not disappear. Mortgage balance, car loans, credit cards, any personal loan someone else is on the hook for. Student loans vary — some federal loans are discharged on death, private loans often are not.
2. Income replacement. Not your whole salary forever. The amount your household would actually miss, multiplied by the years they would need it — usually until children finish education, or until a partner reaches their own retirement provision.
3. Costs caused by the death. Funeral expenses, and often overlooked, the childcare or household help that a surviving partner would have to buy.
4. Minus what already exists. Savings, existing employer cover, any pension death benefit. Employer cover in particular is frequently forgotten and frequently ends the day the job does.
Why the salary multiple misleads
A multiple of income treats two very different households as identical.
Someone with a paid-off house, adult children and substantial savings may need almost nothing. Someone the same age with a large mortgage and two children under ten may need far more than ten times salary. The multiple cannot see the difference because it only looks at one number.
Cover is often bought only for the higher earner. But if the person doing most of the childcare were gone, that care would have to be paid for — and that is a large, immediate, recurring cost. It does not show up in a salary-multiple calculation at all, because no salary stopped.
What changes the number later
Life insurance need is not fixed. It usually falls over time as the mortgage shrinks, savings grow and children become independent — which is the argument for term cover sized to the years that actually need protecting.
Re-check it when the mortgage changes, when a child is born, when you marry or separate, and when employer cover starts or ends.
Before you buy
Check what you already have at work. Then check whether it survives leaving the job.
Get the term right, not just the amount. Cover that expires while children are still dependent solves nothing.
Be accurate on the application. Insurance is priced on what you disclose, and an inaccuracy discovered at claim time is the worst possible moment.
Related reading
This is general information, not insurance advice — see our disclaimer.
Frequently asked questions
Is ten times salary right?
It is a reasonable starting estimate and a poor final answer. It ignores your actual debts, how many years of income would need replacing, and what your household already holds.
Do I need cover if nobody depends on my income?
Usually much less, and sometimes none. Life insurance replaces money other people would lose. With no dependants and no shared debt, there may be little to replace.
Should a non-earning parent be covered?
Often yes. Childcare and household work would have to be paid for if that person were gone, and that cost is real even though no salary stops.
Term or whole life?
Term covers a defined period for a much lower premium. Whole life combines cover with a savings component and costs substantially more. The comparison is in our separate article.
Sources
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