How much term life cover do you need?

Now that you decided that you want to be covered with life insurance (in this case, term life insurance), the next thing you must decide on would be how much coverage you want. Would you want to have

Simply put, computing for how much term life insurance you need can be summed up in this equation:

how much insurance formula

Your ideal coverage amount will be based on several factors:

  1. Who is dependent on your income?

    Who will suffer financial loss in the event of your death (and the eventual loss of your income)? The more dependents you have, the more cover you should get. Please note that “income” is not just only applicable for those who are working. You should also take into consideration the “income” of stay-at-home parents. This income is roughly equal to what the family will have to spend if the stay-at-home parent were to pass away – this will include fees paid for a housekeeper or for child care, if that parent is taking care of children at home.

  2. How much will your family need to spend at the time of your death? This includes:
    • Funeral expenses. The average funeral cost in the UK is £3,000.
    • Estate taxes. Estate taxes can be as high as 40% if you go above a certain threshold.

  3. The Cost of the Primary Caregiver

    Based on Legal & General’s Value of a Parent research 2013:

    • The average value of a Mum is more than £31,000 annually.
    • An average mum spends 71 hours a week on household tasks such as childcare, cooking or cleaning.
    • The annual cost of raising a child is £8,580.
  4. How much does your family need per year to live a reasonable lifestyle?

    You should take into consideration food expenses, utilities, communications and transportation expenses. The coverage amount should be sufficient to cover for your lost income.

  5. How long will your family need this cover?

    When your children are grown up and financially independent, insurance is not that necessary so if your children are young at the time you purchase this policy, you need to be prepared for a considerable amount since their financial independence is still a long way off.

  6. How much do you have now?

    Aside from life insurance, there are other ways for your family to replace the income lost upon your death:

    • Income from your spouse. If you have a two-income household, your spouse’s income can be used to supplement the family’s finances when you are gone. This way, you don’t have to buy as much term life insurance. Instead, you can place the money you could have paid in premiums for that “extraneous” cover into an investment fund, where it is more likely to grow faster by earning more. This also applies to spouses who don’t work – who can earn an income but has opted to stay at home to concentrate on caring for the children and the household.

Other considerations:

Your changing situation and need for life insurance:

You will need to increase your insurance coverage when:

  • You get married or enter into a civil union
  • You become a parent, whenever a child is born or you adopt
  • Get a salary increase or change jobs where the new job offers a higher salary
  • Buy a new house or renew your mortgage

This is where the guaranteed insurability option can help. Every time the above life events occur, the option allows you to raise the amount of your life insurance without the need to present further medical proof.

Are you the primary caregiver? Then compute for the cost of the services you provide for the family and add this in the computation.

Is your spouse the primary caregiver for your children/dependents? The cost for caring for the children in case your spouse has to leave and go to work should be included in the computations.

Savings you now have. Aside from money saved up for your child’s college tuition, your retirement or a down payment for a future major purchase (i.e. a house), your savings can be deducted from the total amount of insurance you need.

State and employer-based benefits. The state provides bereavement benefits for surviving spouses. The couple must be legally married or in a civil partnership. The surviving spouse stand to receive:

How much do you have in debt? How much do you have to pay in credit card debts, car loans and your mortgage? You should allot for these amounts in your coverage.

As a general rule, you should get at least eight to ten times of your annual salary as your coverage. This will allow a sufficient amount to pay for a portion or all of your mortgage debt and still have room left over for the family’s monthly household expenses.

If you are looking to buy a term life insurance policy through the Internet, there are also online calculators to help you compute just how much cover you will need.

Updated on: 04.06.2013

To secure your family's future, fill in the form on the right or call 0808 231 5178 and get your term life insurance quote now.

Types of insurance:
Term life insurance 101:
Life insurers:
*Scottish Provident 2012 life cover claims paid report.