How much life insurance do you actually need?

Step one: add up what would need replacing

Start with the obligations that don't disappear, then add the income that would.

• Remaining mortgage balance
• Other debts that wouldn't be forgiven — loans, personally guaranteed business debt
• Your income, multiplied by the number of years it would need replacing
• Childcare and household costs your household currently absorbs unpaid
• Future education costs you intend to fund
• Final expenses and estate settlement costs

Step two: subtract what already exists

This is the step people skip, and it's usually the difference between a sensible number and being oversold.

• Existing life insurance, including coverage through work
• Savings and investments that would be available
• Your partner's income and earning capacity
• Survivor benefits your household may be eligible for

Step three: sanity-check the shape, not just the size

A single large policy isn't always the right answer. If most of the need disappears when the mortgage is paid and the children finish school, layering two terms of different lengths may cover the same obligation more efficiently than one long policy.

The number tells you how much. The shape of the obligation tells you how long — and both matter.

A caution about the coverage you already have

Group coverage through an employer is genuinely valuable, but it's usually tied to the job. If you change employers, it may not follow you, and the ability to convert it to an individual policy has deadlines. Counting on it as permanent is a common and expensive assumption.

Working through list one properly

The first list is everything that would need paying for if you were not there. It is worth doing line by line rather than reaching for a round number.

• The outstanding mortgage, and any other debt that would survive you in a way that harms someone
• Income replacement - what your household relies on from you, and for how many more years
• Childcare, which frequently has to be bought if the person providing it is the one who is gone
• Education costs still ahead
• Final expenses, including funeral, probate and any outstanding medical bills
• A buffer so nobody has to make a major decision in the first year

Working through list two

The second list is what would already arrive, and it is usually smaller than people assume once they look properly.

Existing personal policies. Employer group cover, counted at its actual amount rather than a vague sense of it, and only if you expect still to be in that job. Savings and investments genuinely available for this purpose rather than earmarked for something else. Any survivor benefits your household would qualify for.

The gap between the two lists is the amount to insure. It is not a formula and it does not need to be precise - it needs to be yours rather than a multiple of income borrowed from an article.

Why income multiples mislead

Rules of thumb like ten times income are popular because they are easy, and they are wrong in both directions often enough to be worth abandoning.

They overstate for a household with no dependants, no mortgage and substantial savings. They understate badly for a young family with a large mortgage and two decades of childcare and education ahead, and they say nothing at all about a non-earning partner whose contribution would have to be replaced with paid help.

The two lists take ten minutes and produce a number that reflects your actual obligations rather than a national average.

Sizing cover on a partner who does not earn

The most commonly under-insured person in a household is the one with no salary, because the income-multiple approach produces a figure near zero.

The right question is what would have to be bought if they were not there: childcare, after-school care, holiday cover, transport, household management. For a household with young children that figure is substantial and it runs for years.

It is a real obligation with a real cost and an end date, which makes it exactly the kind of need term insurance handles well.

Checking the shape, not only the size

Two policies for the same amount can serve a household very differently depending on how long they run.

Work out when each obligation ends - the mortgage on its schedule, childcare when the youngest is independent, income replacement when retirement income takes over. If those dates differ substantially, laddering several policies of different lengths generally costs less than one policy sized to the largest obligation and held for the longest term.

And revisit it. The gap you calculate at thirty is not the gap you have at forty-five, and nothing prompts a review unless you schedule one.

Two cautions about existing cover

The second list is where most calculations go wrong, and it is usually because of one of two things.

Employer group cover is counted at a vague sense of its size rather than its actual amount, and counted as though it will always be there. It is generally a modest multiple of salary set by the employer, and it usually ends with the employment. Leaving a job is the most common way people become underinsured without noticing.

Savings earmarked for something else are counted twice. Money intended for retirement is not also available to replace income for twenty years, and counting it in both places produces a gap that looks smaller than it is.

Reviewing the number

The gap calculated at thirty is not the gap at forty-five, and nothing prompts a review unless you schedule one.

The events worth triggering one: marriage, a child, a divorce, a house move or remortgage, a significant change in income, the death of anyone named on the policy, starting or leaving a business, and leaving a job.

The review itself is short - confirm the amount still matches the gap, confirm the beneficiaries are still right, confirm the policy is in force, and confirm someone knows it exists.

Sanity-checking the answer

A number produced by two lists still benefits from a few checks, because it is easy to get the arithmetic right and the assumptions wrong.

Does it assume your household would keep the house, or move? Does it account for childcare that is currently unpaid? Does it assume the surviving partner returns to work, and is that realistic given their situation? Does the income replacement run to the right year rather than to a round number?

The point is not precision. It is that the assumptions are yours and visible, rather than inherited from a calculator that never asked.

When the number is uncomfortably large

It frequently is, and the useful response is to look at the shape rather than to abandon the exercise.

Most of the total is usually income replacement running for many years, and that obligation genuinely ends. Laddering several policies of different lengths - a longer one for the years until children are independent, a shorter one for the mortgage - generally costs considerably less than one policy sized to the largest obligation and held for the longest term.

Term insurance is also cheaper than most people expect relative to permanent cover. If the figure looks unaffordable, it is worth checking whether it was quoted as term before concluding that.

The short version

List what would need paying for and list what would already arrive. The difference is the amount. Count employer cover at its actual size and only if you expect to still be in the job, and do not count savings twice. Size cover on a non-earning partner against what their work would cost to replace. Then match the term to when each obligation actually ends rather than to a round number.

Getting it wrong in the other direction

Under-insurance gets the attention, and buying more than the calculation supports is a real cost too.

It usually happens one of two ways: accepting an income multiple that overstates the actual gap, or being sold a permanent policy where the underlying need genuinely ends. Both convert money that could be doing something else into cover nobody needed.

The two lists protect against both directions. A number you can explain to yourself is the point of the exercise, not a number that is simply larger.

Do it once, properly

The exercise takes about ten minutes with two lists and a pen, and it is the only part of buying life insurance that nobody else can do for you. Every decision after it - the term, the product, the insurer - depends on getting this number roughly right.

Write the number down

Keep the two lists and the resulting figure with your policy documents. When you review it in a few years, having the original assumptions in front of you makes the update a five-minute job rather than starting again from nothing.

One last thing

The number is yours rather than a formula's, which means it will not match anyone else's and does not need to. What it needs to do is survive being explained to the person who would have to live with it.