Life insurance provides financial security for your loved ones if the unexpected happens. But how do you know how much cover is enough? Taking out too little could leave your family struggling, while too much might mean overpaying for protection you don’t need.

This guide will help you calculate the right amount of life insurance based on key financial factors, including your mortgage, debts, family needs, and future financial goals.

1. Cover Your Mortgage

For most people, their mortgage is their biggest financial commitment. If you have an outstanding mortgage, your life insurance should be enough to cover the remaining balance. This ensures your loved ones can stay in their home without the stress of repayments.

Example: If you have a mortgage of £200,000, your life insurance policy should at least match this amount.

2. Consider Outstanding Debts

Beyond your mortgage, you may have other debts such as personal loans, car finance, or credit cards. These should also be factored in when determining your coverage.

Example: If you have £15,000 in other debts, you need to consider adding this to your required cover.

3. Provide for Your Family’s Living Costs

If your income supports your family, consider how much they would need to maintain their current lifestyle if you were no longer around. Factor in everyday expenses like food, utility bills, and childcare, as well as future costs such as school fees or university tuition.

Example: If your family needs £30,000 per year for 10 years to cover living costs, this would mean adding £300,000 to your policy. Alternatively, you could consider a Family Income Benefit policy which will provide the cover on a monthly basis. This is usually more cost effective and could be easier to manage.

4. Plan for Future Financial Goals

Think about your long-term financial goals for your family. Would you like to leave a financial safety net, fund your children’s education, or cover funeral expenses? These should all be included in your total calculation.

Example: If you want to leave £50,000 for university costs and £10,000 for funeral expenses, factor this into your coverage.

5. Factor in Existing Savings and Benefits

You may already have some savings or employee benefits (such as death-in-service cover). You could consider deducting these from your total required amount to ensure you’re not over-insuring unnecessarily.

Example: If your employer provides death-in-service cover worth £100,000 and you have £20,000 in savings, you can reduce your policy need by £120,000.

However, you need to consider the impact of what would happen if you left your employer and this benefit were to stop.

Furthermore, when it comes to using savings, if these were accumulated for another purpose, you need to consider the impact that using these for an emergency fund would have on your wider plans. 

Calculating Your Life Insurance Need: A Quick Formula

You can use this simple formula as a guide:

Mortgage + Debts + Family Living Costs + Future Goals – Existing Savings/Benefits = Total Cover Required

Each area should be viewed individually to take a policy that’s fit for purpose (i.e. you may take a longer term decreasing policy for a capital and interest mortgage and a shorter term family income benefit policy for family protection).

However, this can be used as a simple guide when making your own calculations.

Final Thoughts

Choosing the right amount of life insurance is about balancing affordability with peace of mind. While there’s no one-size-fits-all answer, understanding your financial commitments can help you make a confident decision.