Guide · Use with the term life tab of the Insurance Premium Estimator
How Much Term Life Insurance Do You Need?
The right amount of term life insurance is the money your family would need if your income stopped, minus what they would already have. The estimator warns you when cover is below five times your income, but that is only a floor. This guide walks through a fuller needs-based calculation, then shows how term length and laddering change the price.
Start with the question the cover answers
Term life insurance pays a lump sum if you die during the term. It exists to protect people who depend on your income: a partner, children, or anyone who shares a mortgage with you. If nobody depends on your income, you may need little or no cover. If several people do, the amount needed is often much larger than people guess.
Quick method: a multiple of income
A common rule of thumb is cover of 5 to 10 times your yearly income. The estimator uses 5 times as its warning level. A multiple is easy, but it ignores the things that make families different: how big the mortgage is, how many years the children need support, and what savings already exist. Treat it as a sense check, not an answer.
Needs-based method, step by step
This method adds up what your family would need and subtracts what they would already have. It is often remembered as DIME: Debts, Income, Mortgage, Education, plus final costs.
- Debts: car loans, personal loans and card balances that would need paying off (not the mortgage, which comes next).
- Income: the yearly amount your family would need to replace, multiplied by the number of years they would need it. This is usually less than your gross salary, because your own taxes and personal spending would stop.
- Mortgage: the balance outstanding, if you want your family to be able to clear it.
- Education: your own target for children's education costs.
- Final costs: your estimate for funeral and other end-of-life costs.
- Subtract what exists: savings your family could use, and any life cover you already have, such as cover through work.
Worked example
A 34-year-old parent earns $70,000 a year. They have two children, aged 2 and 5, and a partner who also works. After tax and the parent's own living costs, the family estimates it would need $45,000 a year to keep going until the youngest child turns 18, which is 16 years away.
| Item | Calculation | Amount |
|---|---|---|
| Debts | Car loan | $15,000 |
| Income | $45,000 × 16 years | $720,000 |
| Mortgage | Balance outstanding | $250,000 |
| Education | The family's own target | $100,000 |
| Final costs | The family's own estimate | $15,000 |
| Total needs | $1,100,000 | |
| Savings | Emergency fund and investments | −$40,000 |
| Existing cover | Workplace cover of 1 × salary | −$70,000 |
| Cover needed | $990,000 |
Rounded up, that is $1,000,000, almost three times the five-times-income floor of $350,000. The income line is simple on purpose: it doesn't add investment growth on the lump sum or allow for inflation, and assumes the two roughly cancel out. If you expect a real return above zero after inflation, the need is a little lower.
Choosing the term
Match the term to the longest need you want covered. In the example, the children need support for 16 years, but the mortgage may run for 25. Here is what the estimator shows for this parent (female, Preferred health class, non-smoker, age 34):
| Option | Estimated monthly premium |
|---|---|
| $350,000, 20-year term (the 5× floor) | $49 |
| $1,000,000, 10-year term | $110 |
| $1,000,000, 20-year term | $140 |
| $1,000,000, 30-year term | $180 |
| Ladder: $500,000 for 20 years + $500,000 for 30 years | $70 + $90 = $160 |
The 10-year term is cheapest but would end while the children still depend on the family's income. The ladder gives $1,000,000 of cover for the first 20 years, while needs are highest, then $500,000 for the last 10, which can still clear what is left of the mortgage. It costs $20 a month less than a single 30-year policy.
The estimator's life rates are illustrative figures chosen for the tool, not quotes from any insurer. Real prices depend on underwriting, often including a medical exam. Use the estimator to compare options against each other, then get real quotes.
How to read the estimate
- The estimate multiplies your cover (in thousands) by a monthly rate for your age band, sex, health class and term. Tobacco use multiplies it by 2.8.
- The estimator uses age bands, so the price jumps at a band edge: the same $1,000,000 20-year policy shows $220 a month at 35 instead of $140 at 34. Real insurers price each birthday, but the direction is the same: cover bought younger costs less.
- If you enter your income, the estimator warns you when cover is below five times that income. Passing that check doesn't mean the cover is enough.
Common mistakes
- Relying only on cover through work. It is often a small multiple of salary, and it may end or need converting if you leave the job.
- Leaving out a parent who earns little or nothing. If a stay-at-home parent died, the family would have to pay for childcare and household help. That cost belongs in the income line.
- Choosing the term by price alone. A term that ends before the youngest child is independent can leave a gap exactly when it matters.
- Setting it and forgetting it. A new child, a bigger mortgage or a large rise in savings changes the answer. Recheck after big life events.
- Counting money twice. If the education fund is already saved, take it out of the education line or the savings line, not both.
Questions people ask
Should both partners have cover?
Usually, if each one's income or unpaid work keeps the household running. Do the calculation separately for each partner, since the needs and existing resources differ.
Is term life better than whole life insurance?
They do different jobs. Term life buys a large amount of cover for a set period at a lower price. Whole life lasts for life and builds a cash value, but costs much more for the same cover. This guide covers term life only.
Do I need life insurance if I'm single with no dependants?
Often not, unless someone else would have to repay a debt you share or pay your final costs. The needs-based method will show a small or zero figure in that case.
Related tools and guides
- Insurance Premium Estimator: compare term lengths and cover amounts side by side.
- Compound interest explained: how a lump sum could grow if it is invested.
The family, amounts and premiums in this guide are examples, not recommendations or quotes. How much cover you need depends on your own situation; a licensed agent or financial adviser can help you check it. This guide is not financial or insurance advice. How we check our calculations.