Why do I need life insurance?
Life insurance is designed to protect the people who depend on you. If you were to die unexpectedly, a life insurance payout will give your family a lump sum that they can rely on for major costs like mortgage, rent, household bills, and everyday living expenses. It will cover the financial gap left by the loss of your income, and give your family peace of mind about money during a difficult time.
A life insurance payout can also help cover costs that arise after death, such as funeral expenses and outstanding debts. As such, life insurance acts as both income protection and a financial stabiliser for your household.
Life insurance calculator: A simple way to work out how much cover you need
The most accurate way to work out how much life insurance you need is to establish your incomings and outgoings on an active, monthly, and future basis, then extrapolate for future trends and other financial obligations that might arise in the event of your death.
If that sounds complicated, don’t worry. Here are some simple steps to help out:
Step 1: Add Up Your Outstanding Debts
First, focus on the money you still owe - costs that would not disappear if you died and could create a serious financial burden for your family.
This usually includes your mortgage, credit cards, loans, car finance, and any other borrowing in your name. Clearing these debts with a life insurance payout can prevent your loved ones from struggling to keep up with repayments or being forced to sell assets.
Mortgages
Many people take out what is known as mortgage protection insurance that will cover the cost of their mortgages in the event of their death. This is because mortgages are often the largest monthly expense that families have to deal with.
If you are the sole breadwinner in your family, it is unlikely that your remaining family members will be able to afford to stay in your property if your mortgage is still to be paid when you die.
Mortgage protection life insurance ensures that you are covered for the extent of your mortgage's term. This means that your life insurance term will be the same as that of your mortgage.
The most popular option for people who are looking to use life insurance in this way is known as decreasing term life insurance. This type of insurance will cover the length of your mortgage and will gradually decrease over time at a rate equal to the amount of debt that you have. This means that the payout will decrease, as will the premiums, because your mortgage debt becomes smaller as you pay it off.
If your mortgage is interest-only, then you should factor in the amount that is still owed for the capital debt. This is because this will need to be paid off before the mortgage can be considered done. It is therefore important to be aware of this and the level of interest when deciding how much to cover yourself for.
Other debts
Similarly to paying off mortgages with life insurance, if you have other debts, then you should also consider using decreasing term life insurance. These debts will be paid off in much the same way as your mortgage would be, and having this safety net in place for your loved ones is the best way to make sure that they don't suffer as a result of debts that you may leave behind.
Step 2: Calculate How Much Income Your Family Would Need
In addition to the debts that you still have to pay off, you should also consider how much it will cost your family to continue with their day-to-day costs. This is especially important if you are the main source of income in your household. Even if you and your partner are both working and earning, it can still be a good idea to factor these costs in, as it may be unlikely that they will be able to maintain their expenses without your financial contribution.
Step 3: Account for One-Off and Future Expenses
Beyond everyday bills, think about large costs that could arise in the future, and work them into your calculation in your calculation. Common examples of one-off and future expenses include funeral costs (which can run into several thousand pounds), school or university fees, wedding contributions, planned home improvements, and so on. If you have children, education costs are often one of the biggest future expenses to plan for.
Adding these amounts to your life insurance total will make sure that your family is not forced to dip into savings or take on debt to cover important milestones.
Step 4: Subtract Savings, Assets, and Existing Cover
The final step is to deduct anything that could already help cover those costs - for example, if your family has savings that could cover funeral expenses, you should deduct this amount from your life insurance figure.
Deductions here could include investments, existing life insurance policies, death-in-service benefits, and so on. You should take your partner’s income or life cover into consideration at this stage, too.
Example: How Much Life Insurance Does a Typical Family Need?
Let’s take the example of a household where one parent earns £40,000 a year and has £180,000 left on the mortgage, plus £10,000 in other debts. They want to provide income for their family for 15 years and cover £15,000 of future costs like funeral and education expenses.
Their debts total £190,000. Income replacement would be £40,000 multiplied by 15 years, which equals £600,000. Adding future expenses brings the total to £805,000.
If the household already has £55,000 in savings and workplace death-in-service cover, this would be subtracted, leaving a required life insurance figure of £750,000. This would be the total cover amount needed to fully protect their family financially based on their current situation.
Adjusting Your Cover: Optional Extras and Considerations
Many insurance companies offer additional extras such as critical illness cover in the case of you falling severely unwell. This means that if you are unable to work, the drop in your income will be covered on your life insurance policy. It is possible to take out a separate policy to cover this type of eventuality, but do try adding this extra when generating a life insurance quote, as it can often come out cheaper.
Critical illness premiums will be higher than normal premiums, so it is worth considering whether or not you will need this. Of course, we can never be sure of what the future holds, but if you are from a family with a history of heart conditions, you may want to go for this add-on. All critical illness add-ons are required to cover an industry‑defined minimum. It is important to find out exactly how extensive a critical illness policy is before you take out this type of cover.
Choosing the Right Type of Life Insurance for Your Needs
Once you know how much cover you need, the next step is choosing the right type of policy. Here are some types of life insurance to consider:
Decreasing term life insurance is commonly used to protect a mortgage, as the payout reduces over time in line with the amount you owe. This keeps premiums lower and matches the way mortgage debt falls as you make repayments.
Level-term life insurance pays out a fixed amount throughout the policy term. This is often used for income replacement or to provide a lump sum for family living costs and future expenses.
Joint life insurance covers two people on one policy and pays out once when the first person dies. This is often chosen by couples with shared financial responsibilities. Single life insurance policies pay out when one named person dies and can offer more flexibility for some households.
Family income benefit pays a regular, tax-free income rather than a single lump sum. If you die during the policy term, your family receives a monthly or annual payment for the remainder of the term. This can be useful for households that rely on one main income, as it mirrors a salary and helps cover everyday bills and ongoing living costs.
Critical illness cover pays a lump sum if you are diagnosed with a serious illness such as cancer, heart attack, or stroke. This money can be used to replace lost income, cover medical cost,s or make medically-necessary changes to your home.
Over 50s life insurance is designed for older applicants who may find it harder to get standard cover. They usually offer guaranteed acceptance without medical checks, but tend to provide smaller payouts relative to the amount insured. They are often used to cover funeral expenses or leave a modest sum to loved ones rather than to protect large financial commitments.
Reviewing Your Life Insurance Over Time
Your life insurance needs are not fixed. For example, major life events like buying a home, having children, changing jobs, or paying off debts can all affect how much financial support your family needs. As your family needs change, so should your life insurance.
It is a good idea to review your policy every few years to make sure it still reflects your financial situation. Keeping your cover up to date will make sure that your family remains properly protected, without paying for more insurance than you need.
Use MoneyExpert’s simple quote comparison tools to regularly check that you’re still getting the very best life insurance for your and your family’s needs.