It's the most common question - and the most important one. The bad news: there's no universal number, and anyone who rattles one off on the spot hasn't tailored it to your family. The good news: the amount can be calculated from a few clearly identifiable items. This article gives the principles; you can do the actual calculation on the worksheet - or bring your numbers to the consultation. This is the expanded successor to the quick-guide-era article of the same name.
- We don't size the amount by guesswork: we match it to the mortgage, the family's expenses, and its plans.
- The three main components: outstanding debts, the expenses of the years to be replaced, and major plans (typically education).
- Existing reserves and cover already in place should be deducted - the goal is to cover the shortfall, not to duplicate it.
Why doesn't a rule of thumb work?
Rules like "X times your gross annual income" are quick but blind: they don't see your loan, your children's ages, the other earner's income, or your reserves. Two families with identical incomes can have real protection needs that differ several times over. A rule of thumb is at best good for a sanity check - for sizing, use the family's own numbers.
The three building blocks
- 1. Debts: the balance of outstanding loans - primarily the mortgage - so that it doesn't fall on the family even in the worst case: how much cover alongside a loan.
- 2. Income replacement: for how many years, and how large a monthly shortfall would need to be replaced if the earner's income were lost - calculated from the family's expenses: how many years?
- 3. Plans: the cost of major goals that rely on income - most typically the children's education - so that the plans stay standing even in the worst case: the Plan Tower principle.
What can be deducted
The goal isn't the largest possible number, but covering the real shortfall. You can deduct readily accessible savings, the surplus from the other earner's stable income, and the amount of existing life insurance - including employer group cover, keeping its limits in mind: csoportos.biz. What remains is the amount to insure.
The two most common mistakes
Under-insurance is the more common: people choose the amount starting from the premium, and the cover ends up a fraction of the real need - a painful realization if something happens. Over-insurance is rarer, but it also costs money: it means paying an unnecessarily high premium for years. A separate article covers both traps: the trap of too little and too much.
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