Every individual’s situation is different and taking out the wrong level of cover could either result in you paying more than you need to in premiums, or in your loved ones receiving an insufficient payout. Therefore, it’s very important that before you start to consider what policy to choose, you know how much money you would actually need the policy to pay out.
There are a few approaches that people take in determining the level of cover they need, for example adding a “0” to their annual salary (so a £35000 salary would equate to £350000 cover) or multiplying their salary by their number of remaining working years, but perhaps a more pragmatic approach is to carefully cost out your debts, income, mortgage and childrens’ educational needs and use this as a baseline.
To do this, you need to total up all debts other than your mortgage, multiply your salary by the number of years that you believe your family will need your income (as a minimum, as long as you will have children living at home), use your last mortgage statement to determine the amount outstanding and work out the cost of sending each of your children to university, factoring in accommodation, books, and so forth. Added together, this total would be a sensible amount to insure for. A DIME calculator [2] may help you to determine this figure.
When considering the amount of cover that you need, you should also consider whether you already benefit from a life insurance policy through your employer. If you are part of a group life insurance scheme at work and have no plans to leave the organisation, you can reasonably safely deduct the amount of that payout from the total you calculated above, and only insure for the difference. This would allow you the same amount of overall protection but with lower monthly premiums.