There is no standard amount of life assurance that is right for every person or family. The appropriate level of cover depends on the financial consequences your death would create and how long those consequences would last.
For some people, repaying the mortgage is the main priority. For others, this would be only part of what their family needed. A surviving partner may also have to replace lost income, fund childcare, clear other debts and meet immediate expenses.
A useful calculation should answer four questions:
- What financial commitments would remain?
- How much ongoing support would your family need?
- How long would that support be required?
- What savings, workplace benefits and existing cover are already available?
This produces a more meaningful answer than applying an arbitrary multiple to your salary. It also reduces the risk of paying for unnecessary cover or leaving your family with a substantial shortfall.
Life assurance and life insurance: is there a difference?
The terms are often used interchangeably, although there is a technical distinction.
Life insurance commonly describes cover that lasts for a fixed period, known as the policy term. It pays a benefit if the insured person dies during that period, subject to the policy terms. If they survive beyond the end of the term, the cover normally ends without a payout.
Life assurance traditionally refers to whole-of-life cover. This is intended to remain in force throughout the insured person’s lifetime and pay when they die, provided the required premiums have been paid and the policy conditions met.
In practice, “life assurance” is also widely used as a general term for different forms of life cover. The distinction matters because a temporary need, such as protecting a repayment mortgage, may require a different policy from a lifelong objective such as providing for a dependant or supporting estate planning.
Who needs life assurance?
Life assurance is worth considering if another person would face financial difficulty following your death. This is most common where there are children, shared debts, a partner who depends on your income or other people relying on your financial or practical support.
Homeowners often arrange cover so that a mortgage could be repaid or reduced. This can protect the family home, but mortgage cover alone may not be sufficient. Even without a mortgage payment, the household would still have everyday bills and may have to manage on one income.
A person who does not earn a salary may also need cover. An unpaid parent or carer makes a financial contribution through the work they perform. If they died, the family might have to pay for childcare or professional care, or the surviving partner might need to reduce their working hours.
Life assurance may also be relevant if you:
- have personal or jointly held debts
- support an elderly parent or another dependant
- own a business or have personally guaranteed business borrowing
- want to provide for funeral and immediate expenses
- intend to leave a defined legacy
- have a potential Inheritance Tax liability.
Someone with no dependants, limited liabilities and sufficient assets may need little or no life cover. The purpose of reviewing protection is not to maximise the amount insured. It is to identify the shortfall that would genuinely arise and arrange proportionate cover around it.
How to calculate how much life assurance you need
A needs-based calculation can be expressed as:
Mortgage and debts + ongoing family support + future expenses + immediate costs − existing provision = indicative life assurance requirement
The apparent simplicity of this formula can be misleading. Each figure needs to be based on a realistic assessment of the household rather than a broad assumption.
Mortgage and other debts
Begin with any borrowing that would need to be repaid or managed. This could include the mortgage, personal loans, car finance, credit cards and business debts supported by a personal guarantee.
Decide whether the intention is to clear the mortgage completely or reduce it to a level the surviving partner could afford. Full repayment can provide greater security, but it will also increase the amount of cover and the premium.
The type of mortgage is relevant. Decreasing term assurance may be appropriate for a capital repayment mortgage because both the debt and cover are intended to fall over time. An interest-only mortgage usually retains its original balance, making decreasing cover less likely to match the liability.
Income your household would lose
The next step is to estimate how much of your income the household actually depends upon. Gross salary is not normally the most useful figure because some of that income will be lost to tax or spent on costs that apply only to the insured person.
Consider regular household expenditure such as food, utilities, transport and insurance. Then establish how many years the support may be required. A family with young children is likely to have a longer need than one whose children are approaching financial independence.
For example, a household requiring £24,000 a year for ten years has an initial income-replacement requirement of £240,000. This remains an estimate because expenditure may change, inflation could reduce the value of the money and any lump sum would need to be managed carefully.
Where the primary aim is to replace earnings, family income benefit may be considered instead of providing the entire amount as a lump sum. This pays a regular benefit for the remainder of the selected term and can align more closely with monthly household costs.
Childcare and caring responsibilities
Childcare is often overlooked, particularly when one parent does not currently earn a salary. If that parent died, the surviving partner might need to pay for nursery care, school clubs and holiday childcare. Alternatively, they might work fewer hours and lose part of their income.
Similar considerations apply when someone provides unpaid care for an elderly or disabled family member. The calculation should reflect both the cost of replacing that support and how long it is likely to be required.
Education costs can also be included where there is a definite commitment, such as school fees or intended university support. These should be separated from essential household expenditure so that the family can distinguish between core protection and additional objectives.
Immediate expenses and longer-term objectives
A modest allowance may be required for funeral costs, legal and administrative expenses, urgent bills and time away from work. This can prevent short-term costs from placing additional pressure on the family while other financial arrangements are being dealt with.
Some people also want to leave a legacy, provide lifelong support for a vulnerable dependant or meet a potential Inheritance Tax liability. These objectives may require a different policy term, ownership structure or type of cover from ordinary mortgage and family protection.
How long should cover last?
The policy term should reflect how long the financial need will continue.
Mortgage protection will often follow the remaining mortgage term. Family cover may need to last until the youngest child is likely to become financially independent, which could extend beyond age 18 if university or other support is anticipated.
Other relevant dates include retirement, the end of school fees, repayment of business borrowing or the point at which a surviving partner’s pension becomes available.
Choosing a shorter term may reduce the premium but can leave the household exposed while important commitments remain. Applying for more cover later may be more expensive because the applicant will be older and their health may have changed.
An unnecessarily long term can also add cost. Different commitments do not always need to be protected for the same period, so separate policies can sometimes provide more precise cover.
Choosing the right type of policy
Level term assurance provides a fixed benefit for an agreed period. It can suit an interest-only mortgage, a fixed family lump sum or a liability that is not expected to reduce. Its main limitation is that inflation can reduce the spending power of the benefit over the long term.
Decreasing term assurance provides a benefit that falls over time. It is commonly used with repayment mortgages but is less suitable for replacing income or leaving a fixed legacy. The assumed rate of decrease should be checked against the mortgage rather than assuming the two balances will always match.
Increasing or index-linked cover allows the benefit to rise, helping to preserve its value. Premiums may also increase, so future affordability needs to be considered.
Family income benefit pays a regular income following a valid claim until the end of the policy term. This can be easier to align with everyday expenditure, although the total potential payout falls as the policy approaches its end date.
Whole-of-life assurance is intended to provide lifelong cover. It may be considered for estate planning, a permanent legacy or lifelong provision for a dependant. As a claim is expected eventually, it is generally more expensive than fixed-term protection. Policyholders should understand whether premiums are guaranteed or may be reviewed.
Couples must also decide between joint and single policies. Joint-life cover usually pays once following the first death and then ends. Two single policies can potentially provide two payouts and greater flexibility, although they may cost more. Cover for each partner can be set at a different level to reflect their respective income and responsibilities.
Why arrange life assurance through Sturdy Edwards?
An online calculation can provide an initial figure, but it cannot determine whether the underlying assumptions are realistic or which policy structure is most appropriate.
Our qualified advisers assess mortgages, debts, income needs, childcare responsibilities, existing policies, workplace benefits and available assets. We then compare suitable arrangements from a range of providers, considering policy terms and underwriting as well as price.
Advice can cover:
- level, decreasing and increasing life assurance
- family income benefit
- whole-of-life assurance
- single and joint policies
- critical illness cover
- income protection.
Protection may also need to work alongside a mortgage, pension, business arrangement or estate plan. As Sturdy Edwards provides wider financial planning and mortgage advice, these areas can be considered together rather than in isolation.
Sturdy Edwards Financial Services is authorised and regulated by the Financial Conduct Authority. Our objective is to recommend appropriate, sustainable protection based on the financial effect that death or illness would have on the client and their family.
If you would like help assessing the amount and type of cover that may be appropriate, learn more about our life insurance and protection advice or contact our team to arrange a protection review.
Related Reading
- Protection Gaps: What Many Families Overlook
- Income Protection vs Critical Illness Cover: Which Do You Need?
For personal guidance, learn more about our life insurance and protection advice .
Important Information
This article is provided for general information and does not constitute personal financial advice or a personal recommendation. The appropriate course of action will depend on your individual circumstances and objectives.
Protection policies are subject to their individual terms, conditions and exclusions. Eligibility and the cost of cover will depend on personal circumstances and underwriting.
Contact our team if you would like to discuss your circumstances and the advice services available.