How Much Term Insurance Do You Need?
Not "10x your income" — the actual number, based on what your dependents would really need to replace.
You need $21,000,000 more cover
This gap is what a term policy should cover — the difference between what your dependents would need and what you currently have.
How this verdict is calculated
This uses the needs-based method — the standard approach used by insurers and fee-only advisors — rather than a multiple of income. It asks what your dependents would actually have to replace, then subtracts what they already have.
- Income replacement: your annual income multiplied by the number of years your dependents would need it.
- Add your outstanding loans, so the family isn't left to service them.
- Add the cost of future goals such as your children's education or a marriage.
- That total is what your dependents would need. Subtract your existing savings and existing life cover.
- What remains, if anything, is the additional cover a term policy should provide.
What the default numbers say
The defaults are an annual income of $12,480, 15 years of income to replace, $31,200 of loans, $20,800 of future goals, $10,400 of savings and $10,400 of existing cover. Replacing 15 years of income comes to $187,200; add loans and goals and the total need is $239,200. Against $20,800 already in place, the gap is $218,400.
Compare that with the rules of thumb. Ten times income would suggest $124,800 and fifteen times $187,200 — both fall well short of the needs-based figure, because a multiple of income can't see the $31,200 of loans or the $20,800 of goals. The reverse can happen too: someone with no debt and large savings can be over-insured by a rule of thumb. The maths is simple, which is why every number you enter matters.
Each extra $10,400 of loans adds exactly $10,400 to the need, and each extra year of income to replace adds one more year of salary — stretching the default from 15 years to 30 adds $187,200.
Needs-Based Method vs Rules of Thumb
"10x income" and "15x income" are the rules of thumb most often quoted. Here's how they stack up against the needs-based method this tool uses, using the default numbers above ($12,480 income, $31,200 loans, $20,800 future goals, $20,800 already in place).
| Method | What it considers | Result with the defaults | Main weakness |
|---|---|---|---|
| 10× annual income | Only your income | $124,800 | Ignores loans, goals and existing savings entirely — can be far too low or too high |
| 15× annual income | Only your income | $187,200 | Same blind spot as 10×, just a different multiple |
| Human Life Value (HLV) | Income, expected career length, sometimes a discount rate | Varies by assumptions, often similar in scale to an income multiple | Still doesn't see your specific loans or one-off future goals |
| Needs-based (this tool) | Income replacement years, loans, future goals, existing savings and cover | $218,400 gap | Needs more inputs than a multiple, and is only as good as what you enter |
Choosing each input
Years of income to replace
Think about how long your dependents would rely on your salary: until your youngest child is independent, until a non-earning spouse could realistically become self-supporting, or until the date you'd have retired. Ranges of 10 to 20 years are common; there is no single right number.
Outstanding loans
Include all of them — home, car, personal and education loans. Covering them means the family keeps the home and doesn't inherit repayments on top of losing your income.
Future goals
Add costs you'd expect to pay for, such as a child's education or a wedding. These are costs that rise over time, so enter a figure you'd expect to pay when the bill arrives, not today's price.
Existing savings and cover
Count only what your family could actually use. The home you live in and money locked into retirement accounts don't help cover expenses, and employer group cover usually ends when your job does, so count it cautiously.
How the result is labelled
If your savings and existing cover already meet the need, the verdict is a clear green — you're adequately covered. If there is a gap of up to three times your annual income, the tool calls it a close call. A gap larger than three times your annual income is flagged as a meaningful gap. With the default income, that threshold is $37,440; the default gap of $218,400 is about 18 times income, so it shows as a meaningful gap.
What this tool leaves out
The method is deliberately simple. Some of what it ignores makes the answer too high and some makes it too low, so treat the figure as a sound working number rather than an actuarial one:
- It doesn't earn returns on the payout. A lump sum invested for your family would generate income, so replacing every year of salary in full overstates the need.
- It doesn't subtract your own personal spending, which would stop if you were gone. This also overstates the need.
- It ignores your partner's income. If they earn, the true gap is smaller — run the tool separately for each of you.
- It doesn't inflate future expenses or goals. Costs that rise over time make the need larger than shown.
- It doesn't include final expenses or medical costs, and it counts savings at face value even if part of them isn't readily available.
After you have the number
Use the result to decide the order of magnitude of cover, then round to a standard policy size. Match the policy term to your longest obligation — the date your youngest dependent becomes independent, your loans are repaid or you plan to retire, whichever runs longest. Buy while you're young and healthy, because term premiums are set at purchase on the basis of your age and health then.
The need isn't permanent. It shrinks as loans are repaid and savings grow, and it jumps when you take on a new loan, marry or have a child, so recalculate at each of those points and yearly otherwise. Be accurate about your health and habits when you apply — a misstatement can put a future claim at risk.
Keep going
- Term Insurance Basics — why pure protection beats bundled policies for most people
- Term Insurance vs Endowment/ULIP — once you know the amount, compare the two ways of buying protection
- Health Insurance Basics — life cover doesn't replace a medical policy
- Net Worth Calculator — work out the savings figure to enter here
Common questions
That rule ignores your actual debts, goals, and existing savings — it can leave you under- or over-insured. The needs-based method here accounts for your specific numbers instead.