At some point, someone probably told you a rule of thumb: "Get life cover worth 10 times your salary." It sounds sensible. It's easy to remember. And it's often completely wrong for your situation.
Life insurance is not a salary calculation. It's about what the money needs to do. And "10x your salary" could leave your family massively over-insured in one area and dangerously under-covered in another. Here's a better framework.
Start with what the money needs to do
When you buy life insurance, you're answering a specific question: if I died today, what financial consequences would my family face, and how much money would they need to weather them? That question has four parts.
Clear the debts
Start with your mortgage, the biggest liability most families carry. If you have a £280,000 mortgage, the policy needs to cover at least that. Add any other significant debts: loans, credit cards, a business liability.
Replace the income
How many years of your income would your family need to maintain their lifestyle without you? Think about your dependants, their ages, and when they'd become financially independent. 5 years? 10? Until the youngest finishes education?
Cover the childcare gap
Often missed. If you're the primary carer and your partner works, your death creates a childcare cost. If you're the breadwinner, your partner may need to reduce their hours. That's a financial hit that needs to be accounted for.
Account for what already exists
Death in service, existing policies, partner's income, assets. The amount of cover you need is the gap between what you have and what your family would need.
A worked example
Say you're 38, earning £55,000, with a £300,000 mortgage, two young children, and a partner who earns £28,000. Your death in service is 3x salary (£165,000).
- Mortgage to clear: £300,000
- Income replacement (10 years × £55,000): £550,000
- Childcare costs: £50,000
- Total needed: £900,000
- Death in service: −£165,000
- Cover gap: £735,000
Under the "10x salary" rule you'd get £550,000, and you'd still be £350,000 short on the mortgage and childcare alone. This is why the formula is dangerous.
Term vs whole of life
For most families, the right product is term assurance: cover for a fixed period (typically 25 or 30 years) that pays out if you die during that term. It's affordable, straightforward, and designed for the period when your financial obligations are highest.
Whole of life policies are different: permanent and guaranteed to pay out eventually, which makes them significantly more expensive and better suited to estate planning than family protection.
The honest truth about cost
For a healthy non-smoker in their 30s, £500,000 of level term cover over 25 years can cost under £20 a month. The longer you wait, the more it costs, because premiums are based on age and health at the time of application.
Every year you delay is a year of not being covered and a slightly higher starting premium when you eventually do it.