How much life insurance do you actually need?

The common rule is ten times income. Like most rules of thumb it is a starting point that fits some households and badly misfits others.

The calculation is not complicated. It just requires being specific.

The needs approach

Add up what would need funding if you died, then subtract what already exists.

Income replacement. How much of your income does your household actually depend on, for how long?

Not your full income — your household would not have your personal expenses. And not forever — until children are independent, or until a surviving spouse reaches retirement resources.

A common approach is to multiply the annual amount needed by the number of years, with some adjustment for investment return and inflation.

Debt. Mortgage balance, other loans, and any debt that would pass to the estate or that a co-borrower would carry.

Education. If you intend to fund children's education, the projected cost.

Final expenses. Funeral costs, medical bills, estate administration.

The value of unpaid work. The most commonly omitted item.

A parent who does not earn income but provides childcare is providing something with a substantial replacement cost. If they died, the surviving parent would face childcare costs or reduced working hours.

This routinely means both parents need cover, not just the earner.

Then subtract existing savings and investments, existing life insurance including employer-provided cover, and any survivor benefits available.

The remainder is the gap.

Employer-provided cover

Frequently counted as though it were permanent, which it is not.

It typically ends when employment ends. It is usually a multiple of salary, which may be well below need. Conversion rights on leaving are often limited and expensive.

Treat it as a supplement, not a foundation. Anyone relying on employer cover has coverage tied to a job they may leave, at exactly the point when other things are also uncertain.

The term length question

Match the term to the period of need.

The usual answer is until the youngest child is independent, or until the mortgage is retired, or until retirement resources are sufficient — whichever is longest.

For a couple in their early thirties with young children and a thirty-year mortgage, a thirty-year term is generally reasonable.

Buying a shorter term to save premium creates a problem at expiry, when you are older, possibly in worse health, and facing much higher rates or uninsurability.

Laddering

Because need declines over time, some people buy multiple policies with different terms.

For example, a thirty-year policy covering the long-term income replacement need, plus a fifteen-year policy covering the period of highest need while children are young and the mortgage is large.

The second expires when the need reduces, lowering total premium over time.

This is straightforward to arrange and reduces cost relative to buying the full amount for the full term.

Who needs cover, and who does not

Generally yes: anyone with dependents, anyone with a mortgage shared with someone who could not carry it alone, anyone whose death would leave a business or a co-signer exposed, and stay-at-home parents providing services with real replacement cost.

Generally no: single people with no dependents and no shared debt; retirees whose savings support their survivors; children, for whom life insurance is generally unnecessary despite being marketed.

Insurance on a child is sometimes sold on the basis of guaranteeing future insurability. That is a genuine but usually small benefit, and there are cheaper ways to address it.

Reviewing it

Need changes. Review after any of: marriage, a child, a house purchase, a significant income change, a divorce, or a death in the family.

And check beneficiary designations at the same time.

Beneficiary designations on insurance generally control regardless of what a will says. Policies still naming a former spouse are a genuinely common and entirely avoidable problem.

The affordability tension

People frequently buy less cover than they need because of the premium.

Two observations.

Term cover is much cheaper than most people expect, particularly at younger ages and in good health. Get quotes before assuming.

And it is better to have adequate term cover than inadequate permanent cover. A household needing $900,000 of protection is far better served by term at that amount than by a whole life policy at $150,000 costing the same premium.

The death benefit is the point. Everything else is secondary.

General information about insurance concepts, not insurance or financial advice. Coverage needs depend on individual circumstances. Consult a licensed advisor about your own situation.