Life insurance calculator

What the number is made of

Life insurance answers a narrow question: if your income stopped permanently tomorrow, what would your family need, and how much of that is already covered? The gap between those two figures is the only amount worth insuring. Everything else is either overpaying or a rule of thumb standing in for arithmetic.

The need side has two parts:

need = PV(income × share × years) + mortgage + debts + education + final costs

The first term replaces the income your household loses, discounted because a lump sum is invested while it is spent. The rest are obligations that fall due whether or not anyone is earning. Against that sits what already exists: savings, survivor benefits, and any cover you hold. On the default household, $1,342,910 of need meets $552,434 of resources, leaving a gap of $790,476.

Why the support period dominates

Everything else fixed, changing only how many years the income has to be replaced.

Five years of support needs $377,328; thirty needs $1,005,074. Expressed as a multiple of income that is 4.4× against 11.8× — from the same salary, the same debts, the same savings. This is the single input most worth getting right, and it is usually decided by your youngest child’s age rather than by anything financial. Note also that the growth is not linear: each additional year adds less than the one before, because distant years are discounted hardest.

Where the multiple rule breaks

Same household, same obligations, only the salary moving.

The required multiple climbs from 7.8× to 10.5× as income rises, and it would climb further with a larger mortgage. The reason is structural: obligations and survivor benefits are fixed amounts, so they shrink in relative terms as income grows, while the income replacement term scales one-for-one. A single multiple cannot describe both behaviours, which is why two families with identical salaries can need cover that differs by several hundred thousand.

Count the benefits you already have

Survivor benefits are the most commonly ignored input, and the most expensive to ignore. Here the monthly figure varies while everything else stays put.

A $2,000 monthly benefit is worth $392,434 over twenty years — nearly half the gap. Leaving it out of the calculation does not make your family safer; it makes you buy $392,434 of cover you are already entitled to, every month, for as long as the policy runs. Your Social Security statement gives the figure your survivors would receive, and it is worth looking up before you take a quote.

How much optimism is priced in

The real return decides how hard future years are discounted. It is an assumption, so it is worth seeing what it is worth.

Assuming a 5% real return rather than 0% cuts the cover you buy by $267,592. That is a large bet to place silently on a portfolio that will be managed by someone who has just been bereaved, at whatever the market happens to be doing that year. A conservative rate — 1% to 2% after inflation — costs a little more in premium and does not depend on the markets cooperating.

The number shrinks every year you live

Everything above is a snapshot of today. But the same household needs less cover each year: the income has fewer years left to replace, and less of the education bill remains unpaid. Below, the same defaults recalculated at five-year intervals, with the education cost falling in step with the support period. The mortgage is held constant, so the floor you can see is the debt.

Ten years in, the same family needs 61% of what it needs today; after twenty, 14%. That decline is the single most useful fact about life insurance as a product, because it says what kind of policy fits: term, not permanent, and sized to the years when the number is high rather than to a lifetime.

It also means a level policy is over-insured for most of its life. Two ways to use that. Buy a term long enough to cover the steep part of the curve and let it lapse, rather than converting it. Or ladder the cover — part of it on a shorter term, part on a longer one — so the total steps down roughly as the need does. Either way, re-run this calculation when the household changes, because the number that was right five years ago is now too high.

What this calculator leaves out on purpose

• Premiums. Pricing depends on age, health, smoking status and the insurer. The output here is how much cover to shop for, not what it will cost.
• Tax. Death benefits are usually free of income tax but may sit inside an estate. The treatment varies too much by country and by policy ownership to model.
• The surviving partner’s earnings. If they work, or would return to work, reduce the replacement share rather than adding a separate field.
• Cover on the non-earning partner. Childcare and household work carry a real replacement cost. Run the tool a second time with that cost as the income figure.

Reading the result honestly

The need this tool measures shrinks every year: the mortgage falls, the children get older, and the savings grow. That is why the honest reading of a large number today is “for now” rather than “forever”, and why re-running it after a move, a birth, a pay rise, or a job change matters more than getting the first estimate exactly right. This is planning, not advice: it knows nothing about your health, your tax position, or the policies available to you. Use it to walk into the conversation with a number of your own.