LifePolicyFactsThe simplest question in life insurance is also the most important: if your paycheck stopped tomorrow, how many years of it would your family need? Answer that, and you have the backbone of your cover amount.
The core calculation
Take your yearly income and multiply it by the number of years your family would need support. Ten years is the classic starting point; fifteen covers most families through the expensive years. Then adjust for the fact that pay rises: income growing 3% a year for 15 years is worth far more in total than 15 times today’s pay.
A worked example
On a 60,000 income growing 3% a year, 15 years of income adds up to about 1,115,935 — not 900,000. That extra 215,935 is the growth most flat multiplications miss. Subtract existing cover and savings — say 100,000 — and the gap is about 1,015,935.
Run your own numbers in the Income Replacement Calculator, which does the growing-annuity maths for you.
How many years is right?
Tie the years to real milestones rather than guessing. Until the youngest child finishes education is the most common anchor. Until the mortgage is paid off is another. Some planners use the years until a surviving partner could support the household alone — perhaps after retraining or returning to full-time work. If your children are grown and the mortgage is nearly gone, five years may be plenty.
What to subtract
The answer is a gap, not a total. Subtract existing life cover, workplace death-in-service benefits you would genuinely keep, and savings earmarked for the family. Do not subtract retirement accounts you would rather leave intact, and remember workplace cover usually ends when you leave the job.
Gross or net income?
Gross income is the standard starting point and keeps the maths simple. If you want precision, use after-tax income — and note that in the US, life insurance payouts to beneficiaries are generally income-tax-free, which stretches the lump sum further. Tax rules differ in the UK, Canada and Australia, so confirm locally.
When income replacement is not enough
Income is only one part of the picture. Mortgage balances, debts and education costs sit on top, which is why the full How Much Life Insurance Do You Actually Need? adds those separately. Think of income replacement as the engine of your cover amount and the other items as the carriages.
Frequently asked questions
Is 10 times my income enough life insurance?
It is a decent rule of thumb, but a worked calculation beats it. Ten times income ignores growth, debts and what you already have — run the numbers instead.
Should I include bonuses and overtime?
Include regular, reliable extra pay. Leave out one-off windfalls. If income varies a lot, use a three-year average.
Does my spouse need the same calculation?
Yes, separately. A non-earning partner’s replacement cost — childcare, housekeeping, lost flexibility — is real; the stay-at-home parent calculator values it.
What if we have two incomes?
Insure the gap each income would leave. If either salary alone covers the household, you need less; if both are essential, both need cover.
Should the years shrink as I age?
Yes. Revisit every few years — as children grow, debts fall and savings rise, the years and the amount you need both shrink.
Educational content only. Not insurance, financial or legal advice.