How Much Life Insurance Should You Buy?

Life insurance could make a massive difference to your loved ones if something unexpected happens to you. When you apply, one of the questions your provider will ask is how much cover you want.

The amount you'll need will depend on your household's circumstances as well as your budget. In this guide, we'll explain the factors you need to consider in order to figure how much cover you may need.

What is Life Insurance?

Life insurance is a specific type of protection that covers you in the event of death. When you pass away, the policy pays out a lump sum to your chosen beneficiaries. This amount paid out is agreed upon with your insurer when you take out the policy. You'll also have a premium to pay each month to keep the policy active.

The more cover you have, the higher your premiums will be, so it's essential to have the right amount. Here are some factors that can affect how much you need.

Factors That Can Affect How Much Cover You Need

1. Your family’s living costs

Every family is different, but what we share in common is the need to cover basic living expenses such as housing, food and utilities. Think about your family's living costs and how you contribute to them. The more responsibility you have, the more support they'll need in terms of cover.

You also need to think about any future costs that could apply. If you have a young family, you need to consider future costs that could arise as your children grow.

2. Outstanding debts

It’s also worth looking at any debts you currently have. Mortgages, car finance, credit cards, or personal loans can all add up. Without life insurance, those repayments could fall on your partner or family.

Having enough cover to pay these off means your loved ones won’t have to worry about losing the family home or struggling with unpaid balances.

Even if your mortgage is nearly paid off, it’s still sensible to include what’s left in your total amount of cover. That way, your family can pay it off in full and focus on maintaining their day-to-day costs instead.

3. Income replacement

Another major factor is how much of your household income you bring in. Life insurance is often designed to replace this lost income for a set number of years, giving your family time to adjust.

A good rule of thumb is to aim for enough cover to replace around five to ten years of your salary. That could provide breathing space for your partner to manage bills, childcare, or a mortgage without rushing into any big financial decisions.

4. Existing savings or assets

You may already have savings, investments, or an even policy through your employer, which can reduce how much additional cover you need. Take note of what you already have in place, like pensions, ISAs, or other policies, as it may mean reducing the amount of cover you need.

Though you may have a policy through work, it's still worth taking out one of your own. The policy tends to stay active whilst you are employed by the company, so if you change jobs in the future, it won't carry over. You may also find that you need

5. Partner’s income and support

Finally, think about how your partner or wider family could support themselves if you weren’t there. Could their income be enough to cover the essentials? Would relatives be able to help with childcare?

Even if your partner works, it’s still worth considering separate cover for both of you. A stay-at-home parent, for example, contributes a huge amount to unpaid childcare and household work. If something happened to them, the cost of replacing that support could be significant.

Policies like joint life insurance are ideal for couples. It covers two people under one policy, usually paying out after the first death in the couple. By having this type of policy, both parties are protected should one of them.

How to Work Out the Right Amount of Cover

There’s no single figure that suits everyone, but a good starting point is to look at your financial responsibilities and how long your family would need support.

You can start by adding up their total debts, regular household expenses, and future commitments such as children’s education or childcare costs. From there, you can get a rough idea of the lump sum that would be needed to keep things comfortable.

Some advisers suggest taking out cover worth around 10 times your annual income. Others recommend focusing on how much your family would actually need to maintain their current lifestyle. It’s not an exact science, but these estimates can give you something to work from.

Choosing the Right Type of Policy

The type of policy you go for will also influence how much cover you should buy.

• Term life insurance lasts for a set period (between 5-50 years) and is designed to protect you during key stages, such as while you’re paying off a mortgage or raising a family. It’s usually the most affordable option.
• Whole-of-life insurance, on the other hand, lasts for the rest of your lifetime and guarantees a payout whenever you pass away. It’s generally more expensive but can be useful if you want to leave an inheritance or cover future costs like funeral expenses.

It can also help to match your policy to your biggest financial commitments. If your main concern is paying off your mortgage, a decreasing term policy might make the most sense than a level term policy.

Common Mistakes to Avoid

A lot of people either overestimate or underestimate the amount of cover they need. Buying too little could leave your family struggling, while paying for more than necessary means you’re spending extra each month without any real benefit.

It’s also easy to forget about your policy once it’s in place, but life can change quickly. Events like new jobs, house moves, or the birth of a child can suddenly shift your financial needs. That's why you should make sure to review your cover every few years and adjust it if things change.

Getting Professional Advice

If you’re still unsure, speaking with a financial adviser or life insurance specialist can make the process easier. They can help you weigh up your family’s specific needs, compare quotes so you’re not overpaying for cover you don’t need.

Ultimately, the right amount of life insurance comes down to peace of mind. It’s about knowing your loved ones will have enough to live comfortably if something happens to you.