How much cover do you need, and for how long?

Two separate questions, not one

Life cover decisions usually start with one number in mind, often the size of the mortgage. But a policy really answers two questions: how much should it pay out, and for how long should it run. Getting the amount right and getting the term wrong still leaves a gap, and so does the reverse. Both need working out before you look at level versus decreasing cover or how the policy should be structured.

What the cover amount needs to replace

The amount of cover you need is whatever would be missing from your household if your income stopped. For most people that has four parts: what's left on the mortgage, what income your family would need replacing, what it costs to raise your children through to independence, and what cover you already have through an employer or an existing policy.

Say, as an example only, a mortgage balance of £220,000, a household that spends £28,000 a year beyond the mortgage, two children who are eight years apart from being financially independent, and an employer death-in-service benefit of £60,000. Add the mortgage balance to the annual spending multiplied by the number of years cover is needed, then take off the existing cover. The arithmetic is yours to run with your own figures; the shape of it stays the same whatever the numbers are.

1. Start with the outstanding mortgage balance.
2. Add your household's yearly living costs, multiplied by the number of years you want that income replaced.
3. Add anything specific, such as childcare or school fees, for the years they apply.
4. Subtract any cover you already have, including an employer's death-in-service benefit.

The total is a starting point for the conversation with an insurer or adviser. Your own circumstances, such as a partner's income or other savings, will move it up or down.

How long the cover needs to run

The term should match whatever the cover is standing in for. If the main job is clearing the mortgage, the term usually runs to the end of the mortgage. If the main job is replacing income while children are growing up, the term usually runs until the youngest is expected to be financially independent, which is often later than the mortgage finishes.

Two situations commonly leave the term too short. A remortgage that extends the mortgage term doesn't automatically extend the cover term, so the two can quietly drift apart. And a policy taken out when a first child was born may end years before a second or third child leaves home. Neither shows up unless you check the dates against each other.

Level cover or decreasing cover

Once you know the amount and the term, the next decision is what shape the payout should take over that term, level, where it stays the same throughout, or decreasing, where it falls roughly in line with a repayment mortgage. Level or decreasing life insurance sets out what each pays at different points in the term and the situations, such as an interest-only mortgage, where decreasing cover can leave a shortfall.

Seeing the shape of it

A single sum assured hides what actually happens year by year. A cover amount and term calculator takes your mortgage balance, remaining term, children's ages, household spending and existing cover, and draws what a level policy and a decreasing policy would each pay out at each point over the term, so you can see where the two diverge. It runs in the browser and nothing you enter is submitted or stored. The result is a starting point for your own thinking, not a recommendation for a specific sum assured or term, and like any calculation built on assumptions it can be wrong for your circumstances if those assumptions don't hold.

Mistakes worth checking for

• Covering the mortgage and stopping there. The mortgage is usually the easiest figure to find, which is exactly why it gets treated as the whole answer. Income replacement and children's costs are easy to leave out by accident.
• Leaving the term fixed after a remortgage. Extending a mortgage without checking the cover term against it is one of the more common ways a gap opens up unnoticed.
• Forgetting cover that already exists. An employer's death-in-service benefit or an old policy from a previous job both count towards the total, and skipping them means paying for cover you don't need.
• Treating a joint mortgage as a joint decision automatically settled. Whether to take one joint policy or two single ones changes who gets paid and when, which Joint life insurance or two single policies follows through for separation and other scenarios.
• Assuming the structure sorts out the tax position. Whether a policy should be written in trust, and what that does to inheritance tax, depends on whether you're married or in a civil partnership, and the answer differs for each. Writing a life insurance policy in trust sets out what HMRC's guidance says for each case.

What to check before you decide

Before settling on a figure and a term, it's worth working through each of these in order:

1. Add up the mortgage balance, the income your family would need replacing, and any specific costs like childcare, then subtract cover you already have.
2. Match the term to what the cover is actually protecting, whether that's the mortgage or the years until your children are independent.
3. Check whether level or decreasing cover fits the shape of what you owe and spend.
4. Decide whether a joint policy or two single policies suits your household, and check what happens to each if circumstances change.
5. Work out whether the policy should be written in trust, based on your marital status.

None of this replaces a conversation with an FCA-authorised adviser about your specific circumstances, particularly where your income, health or family situation is more complicated than a straightforward calculation can capture. Once a policy is in place, What happens when someone claims on life insurance is worth reading too, since the amount and term only matter if the claim itself goes through smoothly.