How much life insurance do I need? Calculating your ideal cover

Should I get life insurance?

Life insurance generally pays a lump sum to a beneficiary if you die within the policy term. It’s particularly important if:

• Somebody relies on your income
• You share financial responsibilities with a partner
• You have children
• You have debts like a mortgage or loans

A payout can help your family manage financially if you’re no longer there to support them.

What should my life insurance cover?

There are a couple of common ways to calculate how much cover you need:

The DIME method

This stands for:

• Debts: loans, credit cards and any other borrowing
• Income: money your family would need to replace your earnings
• Mortgage: paying off the remaining balance
• Education: future costs for your children

Income replacement approach

Some people prefer to focus mainly on replacing their income for a set number of years.

For example, you might want enough cover to support your family until:

• Your children become financially independent
• Your mortgage is paid off
• Your partner reaches retirement age

What debts and payments should I include in my cover?

Your policy should ideally cover any major financial commitments your family could struggle with.

This could include:

• Outstanding mortgage balance
• Personal loans
• Credit card debt
• Car finance agreements
• Funeral costs

The aim is to reduce financial pressure on your loved ones at a difficult time.

How much income replacement cover does my family need?

Think about how much your household needs each year to maintain its current lifestyle.

It’s a good idea to factor in:

• Household bills
• Childcare costs
• Food and everyday expenses
• Holidays
• Rent if you don’t own your property
• Savings goals or future plans

Then consider how long that income would need to continue. Many parents choose cover that lasts until their youngest child reaches 18 or finishes education.

Perhaps your partner earns enough to pay the bills and maintain the family’s lifestyle. Ask yourself: would they have to consider extra childcare costs or work fewer hours if you weren’t there? You could also factor this into your calculation.

How much should I factor in for children’s education?

Your children’s education can be expensive, and it’s worth thinking long term. Even if they’re very young when you take out the policy, you should consider university at least.

You could want your policy to help cover:

• University tuition fees
• Accommodation costs
• Everyday living expenses
• Support while children become financially independent

Including these future costs can provide extra reassurance for your family.

What type of life insurance do I need?

Generally speaking, there are three main types of life insurance to consider:

Level term life insurance

With level term life insurance, the payout stays the same throughout the policy term.

This can work well if you want to leave a fixed lump sum for your family.

Decreasing term life insurance

With decreasing term life insurance, the payout reduces over time, usually in line with a repayment mortgage.

This is often a cheaper option for mortgage protection. Premiums are generally less than other life insurance types because the potential payout decreases over time.

Whole of life insurance

Finally, with whole of life cover, the policy lasts for your entire lifetime and guarantees a payout whenever you die.

It tends to be more expensive than the other type. But you might think it’s worth it, as it can help you plan for things like funeral costs or inheritance.

How much should I pay for life insurance?

The cost of life insurance depends on several factors, including:

• The amount of cover you choose
• The length of the policy
• Your age
• Your health and medical history
• Whether you smoke

Generally, younger and healthier applicants pay lower premiums.

Can I rely on death in service cover instead?

Many employers offer a death in service benefit, which pays a lump sum if you die while employed.

This can be valuable, but it might not be enough on its own.

Typically:

• Cover is limited to around four times your salary
• It usually ends if you leave your job

It’s sensible to have another safety net, not least because you’ll lose your death in service if you change jobs or are made redundant. For many people, a separate life insurance policy provides more reliable long-term protection.

If you want to save money on your life insurance premiums, you could deduct the likely death in benefit payout from the overall amount of cover. Although, again, a death in benefit payout might not be guaranteed.

Do I need critical illness cover?

Also consider whether you want to add critical illness cover to your life insurance policy. This will pay out if you’re diagnosed with a defined serious illness outlined in your policy. This could include:

• Cancer
• Heart attack
• Stroke

This can help to protect you and your family financially if you’re no longer able to work. Critical illness cover tends to be more expensive than simple life insurance, but could prove invaluable.

Can I have more than one life insurance policy?

Yes - there’s no limit to the number of life insurance policies you can have.

Some people use multiple policies to cover different needs, for example:

• A decreasing term policy for their mortgage
• A level term policy to support their children or partner

This can help tailor your protection more precisely to your financial responsibilities.

It’s also important to review your life insurance policy or policies, particularly if your circumstances change. Make sure your policies are fit for purpose if, for example, you move house, have children, get married or divorced.