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How to work out what level of life cover is suitable for you

Life insurance offers crucial protection for your family but knowing how much cover you need can be challenging. Learn how to calculate your protection needs.

12/10/2023
Benchmark customer focused

Life cover is there to protect your family after you’re gone. They may use a payout to clear the mortgage on your home and cover other general living costs. Ultimately, this means they can avoid any financial stress during what will already be a difficult time.

It could also help them secure their retirement as they can use the payout to continue contributing to pensions, savings, and investments.

Unfortunately, many people still do not have this important protection in place. According to Direct Line [1], 63% of people in 2022 did not have a life insurance policy because they thought it was too expensive.

This could mean that these individuals’ families face severe financial hardship if they passed away unexpectedly.

Even among those who do have life insurance, many people don’t have the cover they need. As reported by Mortgage Strategy [2], just 35% of mortgage holders have enough cover to protect their family in the event of their death.

That’s why it’s important to accurately calculate how much your family will need to meet their financial obligations and achieve their long-term financial goals when you’re gone. Equally, you likely want to avoid paying for more cover than you need.

Read on to learn how to work out how much life cover you actually need.

Simple formulas for calculating your life cover needs can be a good starting point

If you don’t know where to start, there are several simple formulas you can use to give a good estimate of how much life insurance you need:

1. Multiply your income by 10

This is the simplest method for calculating your needs. Just multiply your annual income by 10 and add an extra £100,000 for every child.

While this can be useful as a general estimate, it doesn’t take your lifestyle into account. It also doesn’t consider any debts you may have, so you can easily underestimate the cover you need using this method.

2. The DIME method

The DIME (debt, income, mortgage, education) method may be more accurate. It considers the various financial obligations that your family will have after you pass away, and adds them together to give a total figure.

That said, it doesn’t consider existing assets such as pensions, investments, or savings, which could provide an income for your family in the future. As a result, people often pay for too much cover when using this method.

3. The human life value (HLV) method

This is a more nuanced method to calculate how much income you would provide to your family for a set period. The level of life cover you choose aims to replace that income.

You can work this out by adding up your total income for a set period and then subtracting your own expenses and taxes. The remainder is what you would normally contribute to the household finances.

By purchasing life cover for this amount, you ensure that your family’s household income would be similar to what it is now. Theoretically, this means that they can maintain their current lifestyle.

While this may be more accurate than other methods, it doesn’t necessarily consider any wealth that you want to leave to your family, or unexpected expenses they may face in future, like care costs.

None of these methods account for other financial goals you may have, either, such as purchasing a holiday home, for example. So, although they can be useful as a general guide, they are not foolproof.

The crucial factors to consider when working out how much life cover you need

Everybody’s life cover needs are unique and there are many different expenses you may need to account for when making calculations about life cover:

Your current income and debts

Start by adding up your current income from all sources including investments, for example. Then, calculate any debts you have and factor these in to get an idea of the income your family could lose if you die.

Your mortgage

Consider how much you have left to pay on your mortgage, including all the interest and any early repayment charges your family may have to pay if they clear the entire balance.  

Bear in mind that the interest rate on the mortgage could go up in the future, so it may be useful to overestimate to some extent to account for this. You can also purchase decreasing term life insurance that reduces as you pay off your mortgage, so you can avoid purchasing more cover than you need.

The cost of raising children

According to LV= [3], the average cost of raising a child in 2023 is £11,250 a year. However, this figure will likely rise with inflation in the future, so make sure to factor this into your calculations.

It’s also worth noting that this is the cost of raising a child until they are 18. In reality, it’s likely they may need support beyond this. Will you leave enough money to help them through university, get onto the property ladder, or get married, for example?

The age of your dependants

The level of cover you need often depends on the age of your children. If you have adult children who have already moved out, for example, you may not need to cover the cost of supporting them for as long.

On the other hand, if your children are still young, there may be additional costs like childcare to consider or raising them for longer.

Care costs

Your surviving family members may require care when they are older, and this can be incredibly costly. New research reported by This is Money [4] found that the average cost of living in a care home in the UK has risen to £46,000 a year.

This is a significant expense and if they don’t have funds set aside for it, your loved ones could face difficulties. You may be able to help them avoid this by considering these costs when taking out your life cover.

The cost of passing away

The average cost of passing away in 2023 is £9,200 according to SunLife [5], and this can be a significant burden on your family. It may be useful to consider this cost when taking out your life cover.

Bear in mind that this cost is likely to increase in the future so when calculating the amount, you may need to overestimate what you require.

Working with a professional can help you make sense of your life cover needs

There are many costs to consider when working out how much life cover you need. Accounting for inflation or potential changes in your family circumstances in the future can make things even more complicated, too.

That’s why working with a financial planner can be so beneficial. They can use cashflow forecasting to help you make these complex calculations. Additionally, they can give you guidance about the different types of life cover and which is most suitable for you.

Get in touch

If you need to set up or review your life cover, we can help you assess your needs.

Please visit our contact page or speak to your adviser.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Note that protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.

The Financial Conduct Authority does not regulate cashflow planning.

[1] 28.09.2023 Only 35 per cent of people have life insurance cover despite six in ten households agreeing it would benefit their family Direct Line

[2] 28.09.2023 “Squeezed middle” falls short on cover Mortgage Strategy

[3] 28.09.2023 How much will it cost to raise a child in 2023? LV=

[4] 28.09.2023 Cost of living in a care home jumps 11% to £46k a year This is Money

[5] 28.09.2023 Cost of dying: 2023 report SunLife

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Benchmark Financial Planning is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

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