Guide

How much life insurance do I need?

Working out the right amount of life insurance is one of those questions that feels complicated but becomes straightforward once you have a clear framework for thinking about it. The goal is simple: to make sure that if you die, the people who depend on you financially are not left in a position they cannot manage.

The right amount is different for everyone. But there are a few reliable approaches to arriving at a sensible figure, and this article walks through each of them.

Start with the mortgage

For most homeowners, the mortgage is the largest financial commitment in their lives and the most immediate thing life insurance needs to cover.

If you have a repayment mortgage, the outstanding balance reduces over time. A decreasing term life insurance policy is designed specifically for this: it reduces in line with your balance, so you are never over-insured or under-insured relative to what you owe.

The sum assured on a decreasing term policy should match your mortgage balance at the start: if you are borrowing £220,000, that is your starting point for the mortgage element of your cover.

If you want your life insurance to do more than just cover the mortgage (leaving your family with money to live on, paying off other debts, or providing a legacy), you need to build on top of this figure.

Account for other debts

Beyond the mortgage, consider what other financial liabilities would become a burden for your family if you died.

Personal loans, car finance, credit card balances, and any other outstanding debts should be factored into your life insurance calculation. Adding up the total of these debts and including them in your cover amount ensures your family would not inherit a debt problem alongside their grief.

Think about income replacement

If you have dependants (a partner, children, or anyone else who relies on your income), consider how they would manage financially without your earnings.

A common approach is to multiply your annual salary by a number of years: typically five to ten. This is not a precise science, but it provides a fund that could replace your income for a meaningful period while your family adjusts and, if relevant, while a partner returns to work or increases their hours.

For a buyer earning £40,000 per year, five times income is £200,000 and ten times income is £400,000. Whether you sit toward the lower or upper end of this range depends on the number of dependants, their ages, how long they are likely to need financial support, and whether your partner has their own income.

If you have young children who will be financially dependent for many years, covering closer to ten times income makes sense. If your partner earns a good income and you have no children, the income replacement element is less critical.

Consider childcare and future costs

If you have young children and one partner is primarily responsible for childcare, think about the cost of replacing that function if the primary carer died. Childcare costs are substantial: in many parts of the UK, full-time nursery costs more than the average mortgage payment.

If your children are still years from independence, you may also want to consider covering education costs, the transition to adult life, or simply providing a meaningful inheritance. These are personal decisions about what you want your policy to achieve, rather than financial necessities, but they are worth considering when setting your sum assured.

A practical calculation

Here is a worked example that brings these elements together.

This buyer might reasonably hold a decreasing term policy for £210,000 to cover the mortgage, and a level term policy for £200,000 to cover debts and provide income replacement for dependants. Alternatively, they might take a single level term policy for £420,000 that covers all of these needs in one.

Neither approach is wrong. The right structure depends on your specific situation and what you are trying to achieve.

Does your employer provide life insurance?

Many employers offer a death in service benefit as part of their employment package (typically two to four times your annual salary), paid as a lump sum to your beneficiaries if you die while employed.

If you have death in service cover, it is worth factoring into your calculation. It reduces the amount of additional life insurance you need to arrange privately.

However, there are two important caveats. Death in service cover ends if you leave the employer, which means it is not a permanent solution. And the amount it provides is fixed: if your salary or your financial commitments change, the cover does not adjust. Personal life insurance stays with you regardless of where you work and can be set at whatever level you need.

Do not underinsure to save a small amount on premiums

The cost of life insurance typically scales with the sum assured, but not dramatically so. Halving the amount of cover you hold does not halve the premium; it usually reduces it by considerably less.

Given that the whole point of life insurance is to provide genuine financial protection, choosing a sum assured that is meaningfully lower than what your family would need in order to save a few pounds per month on premiums defeats the purpose. The additional monthly cost of being properly insured rather than partially insured is usually modest.

An adviser can run different scenarios for you so you can see exactly what different levels of cover cost and make a genuinely informed decision rather than guessing.

Review it as your life changes

The amount of life insurance you need changes over time. Your mortgage balance falls. Your income rises. You may have children. Your partner's circumstances may change.

Most people set up a life insurance policy when they buy their first home and never review it again. This is a mistake. A policy that was the right size when you bought has not adjusted to reflect ten years of inflation, salary growth, and changed family circumstances.

Building a regular review into your financial life (at minimum when your mortgage deal changes, when you have a child, or when your income changes significantly) ensures your cover remains appropriate.

The short version

The right amount of life insurance depends on your outstanding mortgage, your other debts, the number and age of your dependants, and your income. A reasonable starting framework is to cover the mortgage balance in full, add your other debts, and add a multiple of your income that reflects how long your family would need support.

The precise number is less important than the exercise of thinking it through honestly. An adviser can help you arrive at a figure that is genuinely appropriate for your circumstances, and make sure the policy structure achieves what you intend.

Have a chat, no pressure

This article is for informational purposes only and does not constitute financial or insurance advice. Always speak to a qualified adviser before making decisions about protection or insurance products.