Replacing income

What actually stops

• Salary, bonus and commission
• Employer retirement contributions
• Employer-subsidised health coverage, which can be a large monthly cost to replace
• Other employer benefits with real value
• Unpaid work a household relied on — childcare, eldercare, running the home

Sizing it

Start with the annual amount the household would need to replace, not gross salary — subtract what the deceased spent on themselves, add costs that appear when they're gone, such as paid childcare.

Then decide the number of years. Until the youngest child is independent, until a partner could support themselves, or until retirement, depending on the household.

Multiply, then adjust for other resources: a partner's earnings, existing coverage, savings, and any survivor benefits from Social Security or a pension.

Why multiple-of-income rules mislead

Rules of thumb ignore whether you have a mortgage, whether a partner earns, how old your children are, and what survivor benefits apply. Two households with identical incomes can need very different amounts.

They're a sanity check, not a method. Use them to test a number you calculated, not to produce one.

Lump sum versus income stream

A death benefit arrives as a lump sum unless you elect otherwise. Some families prefer an instalment arrangement so the money arrives as income rather than as a single amount someone has to manage while grieving.

Interest paid on money the insurer holds is generally taxable while the death benefit itself generally isn't, so weigh that before electing anything other than a lump sum.

The coverage that isn't life insurance

The probability of a working-age disability interrupting income is worth taking as seriously as death, and life insurance does nothing for it.

If you're sizing income replacement properly, check what disability coverage you have and what it actually replaces. For many working people it's the larger gap.