How Much Life Insurance Do You Really Need? A Practical Guide
Search “how much life insurance do I need” and you’ll get the same tired
answer everywhere. Ten times your income. Sometimes twelve.
It sounds authoritative. It’s also close to meaningless, because it ignores
the only things that actually matter: what you owe, who relies on you, and
how long you’d want to give them.
Nobody enjoys sitting down to put a number on this. But the number was
never really about you. It’s about what you’d want to still be true for your
family if you weren’t around. So forget the multiplier and start there.
Start with three questions, not a multiple
Before any dollar figure, three questions do most of the work.
- Who depends on your income? A partner, kids, a parent you help
support. - What debt would they be left holding? Mortgage, personal loans,
the car. - How long would they need to adjust? Time to find their feet
before the big decisions about the house, the kids’ school and work all
land at once.
The answers to those, not a multiple of your salary, are what shape the
right level of cover.
A starting point if you have a mortgage
A sensible place to begin:
Two years of your income, plus your mortgage balance.
The mortgage piece clears the debt, so the home isn’t the thing that has to
be sold on a single income. The two years of income covers everything else,
and buys what a family needs most in that first stretch: time. Time to
make decisions calmly, rather than rushing back to work because the bills
won’t wait.
Some families want more than that, some less. It comes down to how long
you’d want to give them before earning again becomes urgent.
A starting point if you don’t have a mortgage
Renting, or own the place outright? The conversation usually starts here
instead:
Five years of your income.
Without a mortgage to clear, the cover replaces your income rather than
wiping a debt. Five years gives a family room to make the big calls calmly.
Where to live, whether a partner keeps working or steps back for the kids,
what the next chapter looks like.
Adding for the kids
A common way to think about cover for children:
$20,000 to $50,000 per child, per year, until they turn 20.
So a five-year-old sits at roughly $300,000 to $750,000 of cover,
depending on how much you’d want to provide. Two kids doubles it.
This is the money that keeps a childhood feeling normal. School costs,
sport, music lessons, the family holiday. The ordinary things that quietly
add up over the years, and that you’d no longer be there to cover yourself.
A worked example
Couple, two kids aged 5 and 8. One income of $90,000. Mortgage of
$500,000.
- Two years of income: $180,000
- Mortgage: $500,000
- Two kids at $30,000 a year until age 20: roughly $810,000
- Rough starting point: around $1.49 million
Compare that to “ten times income,” which lands at $900,000. It sounds
like plenty until you trace it through: it clears the mortgage and leaves a
partner with very little to actually live on. The shortcut isn’t just imprecise
here, it’s wrong by half a million dollars, in the one direction that matters.
Some advisers would land higher, some lower. The point is to use this as a
conversation starter, not a final answer.
Why the rule of thumb is only a starting point
Two families with identical incomes can need very different cover.
Grandparents nearby who could help with the kids changes the picture. So
does $200,000 in the bank versus $5,000, or a partner who could
comfortably return to full-time work versus one who couldn’t. The rule of
thumb can’t see any of that. A proper conversation can.
That’s the real difference between a number off a search result and a
number built for your family. One gets you in the ballpark. The other gets
you to the figure that actually fits.
What to do next
If you’d rather your family had a real number than a guess, the next step is
a fact-find conversation. We sit down, look at your whole situation, and
build the recommendation around it.
Book a 15-minute chat and we’ll work through it with you.
This article is general information only. It does not take your personal situation into account
and is not financial advice. For advice specific to you, speak to a licensed financial adviser.
