How Much Life Insurance Do I Need? A Step-by-Step Calculation Guide
Choosing a life insurance sum assured requires more than a rule of thumb. This guide walks through a structured calculation — mortgage balance, income replacement, childcare costs, and other obligations — to arrive at a figure that reflects your actual financial exposure.
Why "10× your salary" is not enough
The common rule of thumb — insure 10 times your annual income — is a useful starting point but a poor final answer. It does not account for: your existing mortgage balance, the number and ages of your children, your partner's income, existing savings or investments, employer death-in-service benefit, or whether your partner could earn more if they needed to.
A better approach is to build the sum assured from specific financial obligations, as shown below.
A structured approach to calculating your sum assured
1
Outstanding mortgage balance
This is the most straightforward element. Your dependants should not need to sell the home to repay the mortgage. Use the current outstanding balance, not the original loan amount.
2
Income replacement
How many years until your youngest child is financially independent? Multiply your annual net income by that number. Example: £35,000 net × 18 years = £630,000. You can reduce this by the expected growth of your partner's income and savings over that period, but err on the side of more rather than less.
3
Childcare and domestic costs
If you are the primary caregiver (or even if you share equally), your death creates a childcare cost. Full-time childcare for one child costs £12,000–£20,000 per year. Include the years until school age and a reduced figure through school years.
4
Other debts and obligations
Personal loans, credit cards, car finance, school fees — any obligations your estate or surviving partner would need to fund. Include these in full.
5
Deduct what already exists
Subtract: employer death-in-service benefit, existing life policies, investment or savings your partner could access. The result is the gap your new policy needs to fill.
Example calculation
Life insurance calculation FAQ
Frequently asked questions
- You should calculate each partner's life insurance separately, based on the financial impact of their death. The question is: if this person died today, what costs would the surviving partner face that they could not currently cover? For the primary earner, that is mainly income replacement and mortgage. For a non-earning or lower-earning parent, it is the cost of childcare, domestic support, and the disruption to earning capacity. Both need cover — just potentially at different levels.
- Yes — employer death-in-service (typically 2–4× annual salary) can be deducted from the total you need to buy privately. But note: employer benefits are only available while you are employed there. If you change jobs, are made redundant, or go self-employed, the employer benefit disappears. A policy in your own name is portable and independent of employment. Some people hold a smaller private policy to supplement employer cover; others prefer full independence.
- For a term policy, you can either: buy a level sum and accept that the real value erodes over time (appropriate if the main purpose is mortgage protection, since the debt also reduces), or buy an increasing cover policy where the sum assured rises with inflation each year (appropriate for income replacement over a long term). Increasing cover costs more but maintains purchasing power. See term life cover for the main policy types.
- Common approaches: match the mortgage term; or run the policy until your youngest child is financially independent (typically 18–25). A longer term increases the premium. If the primary purpose is protecting dependants, the policy needs to run until there are no dependants. If it is purely mortgage protection, match the mortgage term. Review the term at major life events — a second child or a larger mortgage may mean extending cover. See our guide to reviewing cover.