How much life insurance do you really need?

Deciding how much life insurance to buy can feel overwhelming.

You want to make sure your family is financially protected, but how do you figure out the right amount of coverage? It’s not one-size-fits-all, but there are simple steps to help guide you.

Here’s how you can determine how much life insurance you really need.

1. Start by calculating your debts

The first step is to look at any debts you owe.

This includes things like your mortgage, car loans, credit cards, and personal loans. If something happens to you, your life insurance should be enough to pay off these debts so your family doesn’t have to worry about them, and is one of the many reasons why having life insurance is important.

If you outlive your life insurance policy, it’s important to consider coverage for remaining debts such as a £200,000 mortgage or £10,000 in car loans.

2. Consider future living expenses

Next, think about how much life insurance payout your family will need to live comfortably if you’re no longer there to provide for them.

This includes everyday costs like rent or mortgage payments, groceries, utilities, and other household expenses. A common rule of thumb is to have coverage that replaces your income for at least 5 to 10 years.

If you earn £30,000 a year, you might want a policy that provides £150,000 to £300,000 to cover lost income for your family.

3. Factor in children’s education costs

If you have children, you’ll want to consider their education costs when deciding on life insurance coverage.

Whether you plan to help pay for university fees or other schooling expenses, make sure your policy can cover those future costs. The average cost of university in the UK is around £9,000 a year, so if you have two children, you might need at least £54,000 (£9,000 per year for 3 years, per child).

4. Don’t forget final expenses

Funeral costs in the UK can range from £4,000 to £5,000 or more.

Make sure your life insurance policy includes enough to cover final expenses and potential life insurance inheritance tax, so your family isn’t left to handle the costs. Some people choose to add a bit more to this amount for other costs, like legal fees or settling an estate.

5. Adjust for inflation and rising costs

It’s important to remember that costs will likely increase over time due to inflation.

For this reason, many people choose to add a little extra coverage to their life insurance to account for future price increases. Even just an extra 10-20% on top of your estimated needs can help ensure your family is fully protected, no matter how expenses change.

6. Review any existing coverage

Before buying a new policy, check if you already have any life insurance through your employer or other sources, and consider whether term or whole life insurance better fits your long-term needs.

Employer-provided life insurance is usually a nice perk, but it’s often not enough to cover all of your family’s needs. Most work policies only provide a small amount, often 1-2 times your salary. Consider how much additional coverage you might need on top of this.

7. Consider your family’s specific needs

Each family is different, so you’ll want to think about any specific needs your loved ones might have.

Do you have a family member with special healthcare needs? Are you the main provider for an elderly parent? You may need more coverage to help support these long-term commitments.

Final thoughts

Deciding how much life insurance you need involves a bit of calculation, but it doesn’t have to be complicated.

Add up your debts, future living costs, education expenses, and final costs. Then, think about inflation and any special needs your family has. This should give you a clear idea of the coverage amount that will give your family the financial protection they deserve.

If you’re unsure, it’s always a good idea to talk to a life insurance provider that can help you fine-tune the numbers.