Start with what would need paying and for how long, not with a round number. Most people either guess, or insure the mortgage and nothing else. Both approaches usually leave a gap.
A practical way to work it out
Add up four things:
1. Debts that would need clearing. The mortgage first, then any loans, car finance and credit cards. This is the part most people already cover.
2. Income that would need replacing. If your household lost your income, how much would it need each year, and for how long? Until the children finish education is a common answer. A rough figure is the annual amount multiplied by the number of years.
3. One-off costs. Funeral costs, and any inheritance tax that might fall due.
4. Anything already in place. Death in service from your employer, existing policies, savings. Subtract these — there is no point insuring the same thing twice.
What remains is your gap. It is usually larger than people expect, because step two is the part that gets forgotten.
Which type of cover
Level term. The sum stays the same throughout. Suits income replacement and interest-only mortgages, where the debt is not reducing.
Decreasing term. The sum reduces roughly in line with a repayment mortgage. Cheaper, and appropriate if the only purpose is clearing that mortgage.
Family income benefit. Instead of a lump sum, it pays a regular annual income to your family for the remainder of the term. Often the most cost-effective way to cover income replacement, and easier for a family to manage than a large lump sum. Underused, in our experience.
Whole of life. Covers you whenever you die rather than for a fixed term. More expensive, and used mainly for estate planning rather than for family protection.
Many households are best served by a combination — decreasing term to cover the mortgage, plus level term or family income benefit for the income.
Joint or single policies
Couples are frequently offered a joint life first death policy, which pays out once, on the first death, and then ends.
It is cheaper than two single policies. But it pays only once, leaving the survivor with no cover afterwards, at exactly the point they may find it more expensive or harder to obtain.
Two single policies cost more, pay independently, and each person keeps their own cover. They also separate cleanly if the relationship does — a joint policy is awkward to unwind.
Where the budget allows, two single policies are usually the better structure. Where it does not, joint cover is far better than none.
Do not forget the non-earner
A household where one partner works and the other cares for children often insures only the earner.
If the caring partner died, the surviving parent would face childcare costs, may need to reduce hours, or might stop working altogether. That is a real financial loss even though there was no salary.
Cover both. The sums may differ, but the second should not be zero.
Write it in trust
This is the step almost everyone skips, and it costs nothing.
See our guide on putting life insurance in trust — it explains why a policy written in trust normally pays out faster and sits outside your estate for inheritance tax.
The cheapest quote is not the answer
Life insurance is more comparable than most protection products, since the trigger is straightforward. But three things still vary:
Underwriting. Whether the insurer accepts you at standard rates, applies a loading, or excludes something. Guaranteed or reviewable premiums. Reviewable starts cheaper and can rise substantially. Added benefits. Terminal illness cover, waiver of premium, the option to increase cover later without new medical evidence.
A quick sense check on the number
Once you have a figure, test it against a simple question: if this paid out tomorrow, would the household be financially stable in five years' time?
Clearing the mortgage alone rarely achieves that. A family with no mortgage but no income still has to eat, run a car, and cover childcare while the surviving partner works out whether they can keep their job.
Conversely, do not over-insure to the point where the premium becomes uncomfortable and you cancel it in two years. Cover that lapses is worth nothing. A slightly smaller sum you will definitely keep paying beats a larger one you will not.
Somewhere between those two is the right answer, and it is usually easier to find by talking it through than by using an online calculator.
Review it when life changes
Cover set when you bought your first flat will not fit after a bigger mortgage, a marriage or children. Look at it whenever something significant changes — and before cancelling anything, make sure the replacement is underwritten and in force.
Call 0116 277 7536 or see income protection insurance in Leicester.
More guides: protection guides for Leicester.
