How much life insurance do you actually need?

Somebody will eventually tell you to buy ten times your income. It isn't a terrible starting point, but it isn't an answer either — it takes no account of whether you have a mortgage, whether your children are three or thirty, or whether your spouse has a pension of their own.

Here's the version that actually works.

Step one: what would need paying for

Write these down. Real numbers, not estimates you're embarrassed by.

Debts that would remain. The mortgage balance, any car loans, anything on credit. Would your household want to clear them, or could they carry on paying them? Either answer is fine; be deliberate about it.

Income that would need replacing. Not your whole salary forever — the portion your household actually depends on, for the number of years they'd depend on it. If your spouse works and your children are grown, that period may be shorter than you'd assume. If you have a dependent who will always need support, it may be much longer.

Costs still ahead. Education is the usual one. So is a specific commitment you've made to someone.

Final expenses. A funeral is a real bill arriving in a bad week. See final expense cover.

Step two: what's already there

This is the step people skip, and skipping it is how they end up over-insured.

• Savings and investments that would be available.
• Existing coverage, including any policy through work. Find out the actual amount — people routinely misremember it, and it usually ends when the job does.
• Social Security survivor benefits, which can be significant for a surviving spouse or children and are frequently left out entirely.
• A surviving spouse's own income and retirement savings.

Step three: subtract

What's needed, minus what's there. That difference is the gap, and the gap is what insurance is for.

The part the arithmetic doesn't capture

Two questions numbers won't answer:

How long would your household need not to make decisions? Money buys time as much as it buys things — time before selling a house, time before going back to work. Some people want a year of that; some want five.

Is there anything you've promised? Helping with a grandchild's education, keeping a family property, making things even between children who received different amounts of help. These are purposes, not expenses, and they belong in the number if they matter to you.

Then, and only then, the product

Once you know the amount and roughly how long it's needed for, choosing between term and permanent gets much simpler. A need with an end date points one way; a need that doesn't end points the other.

Working it in this order — amount first, product second — is also the best protection against being sold something that doesn't fit. It's much harder to talk someone into the wrong policy when they arrive already knowing what they're solving for.