Life cover estimator

The usual advice is to buy ten times your salary. It is easy to remember and it is wrong for most people, too much for a single renter with no dependants, far too little for a sole earner with a mortgage and two children. Life cover is not a multiple of income. It is the size of the financial hole your death would leave, minus what is already there to fill it.

Building the number from the obligations

Work from what the money would have to do. The common framework is sometimes called DIME, debt, income, mortgage, education, and its virtue is that every component is a real obligation you can look up rather than a rule of thumb.

• Income replacement. Your earnings, for the number of years your household would need them. This is almost always the largest component.
• Mortgage payoff. The outstanding balance, if you want the home owned outright.
• Other debts. Car loans, credit cards, student debt, anything a survivor would still be servicing.
• Final costs. Funeral and burial or cremation, plus any medical bills and estate administration.
• Education. What you intend to fund per child, for the number of children you are providing for.

Why fifteen years of salary is not fifteen times salary

This is the part almost every simple calculator gets wrong. A lump sum paid out at death is not spent on day one, it is invested and drawn down over years. Money that will not be needed until year twelve has eleven years to earn a return, so you do not need to insure its full future value today.

What to subtract, and what not to

Against the total need you can offset assets that could actually be spent. Cash savings, taxable investments, and any life cover already in force. Two common mistakes here both point in the same direction: overstating the offsets and buying too little.

• Retirement accounts are usually not an offset. A surviving partner still needs to retire. Counting a 401(k) as cover means solving one problem by creating another.
• Employer group cover ends with the job. It is typically one or two times salary and disappears if you are laid off or change employers, which is often precisely when you are least insurable.
• Home equity is not liquid. Unless the survivor plans to sell and move, it cannot pay grocery bills.
• Social Security survivor benefits are real and can be substantial for a family with young children. They are not modelled in the calculator above, so including them would reduce the figure. Check your own estimate rather than guessing.

Term against permanent

Term insurance covers a fixed number of years and pays only if you die within them. Permanent insurance, whole life, universal life. Covers you for life and accumulates a cash value, and costs several times more for the same death benefit.

For the overwhelming majority of households the correct answer is term, and the reason is structural rather than ideological: the need itself is temporary. The mortgage gets paid down, the children finish education, retirement savings accumulate. A 35-year-old with young children and a large mortgage has an enormous need that shrinks every year and, by 65, has largely disappeared. Insuring a temporary need with a permanent product means paying for decades of cover you will no longer require.

Permanent cover has genuine uses. Funding estate tax liabilities, providing for a dependant with lifelong needs, or certain business succession arrangements. If those apply to you, they are worth proper advice. If they do not, the difference in premium invested elsewhere will almost always do more work.

What actually moves the premium

• Age. The single biggest factor, and it only moves one way. Every year of delay is permanently more expensive.
• Tobacco use. Smoker rates are commonly two to three times non-smoker rates for identical cover. Most insurers require twelve months clear before reclassifying.
• Health and family history. The medical exam sets your rating class. Deferring an application until after a diagnosis is a costly instinct.
• Term length and amount. Both scale the premium, which is what makes the calculation above worth doing properly rather than rounding upwards.
• Riders. Waiver of premium, accelerated death benefit and child riders each add cost. Some are worth it; none should be bought without knowing what they cost separately.

One last point that is not about arithmetic. If nobody depends on your income, no partner relying on it, no children, no co-signed debt, no business partner exposed. You may not need life cover at all, and no calculator should talk you into it. The right amount for some people is zero, and disability insurance, which protects the income you are far more likely to lose, is the more valuable purchase.