Insurance: Life insurance — who needs it, what kind, and how much

Life insurance exists to solve one specific problem: ensuring that the people who depend financially on your income are not devastated if that income stops permanently. If no one depends on your income, you probably do not need it.

Life insurance is one of the most purchased and least understood financial products. Many people have it because an employer provided it or an adviser recommended it without explaining why. Many people who need it do not have enough of it. Many people who have it are paying for the wrong type, or more than they need. The decisions are not complicated once you have a clear framework — but the financial services industry does not always make that framework obvious.

The one question that matters most

Before any discussion of type or amount, there is one question: do other people depend financially on you?

If you have a partner, children, or other family members who rely on your income to maintain their standard of living, and if your death would create a significant financial hardship for them, you need life insurance. The purpose is to replace your economic contribution to their lives for long enough that they can adjust.

If you are single with no dependants and no significant financial obligations, life insurance is unlikely to be necessary. If you are partnered with no children, jointly own assets, or have a partner whose income could cover shared obligations without yours, the need depends on specifics.

The question is not sentimental — it is financial. Life insurance is not about how much people will miss you. It is about whether your death would leave specific people in financial difficulty that insurance proceeds could address.

Term versus whole-of-life insurance

Once the need is established, the choice between the two main types is the next decision.

Term life insurance provides cover for a defined period — typically 10, 20, or 25 years. If you die within the term, the policy pays out. If you survive the term, the policy ends with no payment and no cash value. Term insurance is substantially cheaper than whole-of-life insurance for the same level of cover, because most people survive their policy term.

Whole-of-life insurance (called permanent life insurance in the US — universal life, whole life, variable life) provides cover for the entirety of your life, with a guaranteed payout whenever death occurs. It also builds a cash value component over time, which can be borrowed against or surrendered. Whole-of-life products are significantly more expensive than term policies for equivalent death benefit.

For the vast majority of people, term life insurance is the appropriate choice. The purpose of life insurance is to cover a period of financial dependency — while children are young, while a mortgage is unpaid, while a partner is not yet financially self-sufficient. These needs are time-limited. Once the mortgage is paid, children are financially independent, and a retirement fund has accumulated, the need for life insurance typically diminishes or disappears. Term insurance matches the product to the need.

Whole-of-life products are appropriate in specific circumstances: for estate planning purposes (covering an inheritance tax liability, for example), for business protection (key person insurance, shareholder protection), or for people with lifelong dependants such as disabled children or family members who will always need financial support. For the general case of a working adult with a mortgage and young children, term insurance is almost always more appropriate and substantially cheaper.¹

How much cover

The calculation has two components: replacing income and covering specific liabilities.

Income replacement: A commonly used target is 10 times annual salary. This is a rough guide — the precise figure depends on your partner's income, the number and ages of your children, your lifestyle costs, and how long the dependency will last. A detailed calculation considers: how many years until your youngest child is financially independent, what annual income your family would need during that period, less your partner's income, less any other income sources (state benefits, pension death benefits).

Specific liabilities: The outstanding mortgage balance is the primary liability. If your partner could not service the mortgage alone, a policy sized to cover the remaining balance — decreasing term insurance, where the cover reduces in line with the mortgage balance — ensures the family home is protected.

A practical approach: calculate the income replacement need and the mortgage separately, then combine. Review every five years or after any major life change.

Employer death-in-service benefit: Many employers provide a lump sum benefit of 2–4 times salary on death in service. This should be factored into the calculation and reduces the amount of personal life insurance needed. Note that it is lost when you leave the employer.

Critical illness and income protection — briefly

Life insurance covers death. Two related products are often discussed alongside it:

Critical illness cover pays a lump sum on diagnosis of a defined serious illness (cancer, heart attack, stroke, and others). This covers the scenario where you survive a serious illness but face significant financial disruption. It is not life insurance but addresses an adjacent risk.

Income protection insurance pays a proportion of salary (typically 50–70%) during periods when illness or injury prevents you from working. For most working adults with dependants and limited savings, income protection is at least as important as life insurance — because the probability of being unable to work for six months or more during a career is significantly higher than the probability of dying during the working years. Income protection is covered in the first insurance article in this series.

Practical guidance

• If you have dependants and no life insurance, start here — term insurance is the most cost-effective protection available and premiums are lowest when you are young and healthy. The cost increases significantly with age and health conditions.
• Get term insurance sized for the period of dependency — align the term to when your youngest child will be financially independent, or when the mortgage will be paid off, whichever is later.
• Disclose fully and accurately — life insurance premiums and terms are based on risk information you provide. Non-disclosure of health conditions or lifestyle factors can render a policy void when it matters most.
• Review every five years — as your financial situation changes (mortgage paid down, children grown, retirement fund accumulated), your life insurance needs change. You may need more, less, or none.
• Understand what your employer provides — death-in-service benefits reduce the personal cover you need. If you change employers, check whether the new employer provides equivalent cover.
• Consider whole-of-life only for specific purposes — if an Independent Financial Adviser (IFA) recommends whole-of-life for a general protection need, ask specifically why term insurance would not serve the same purpose at lower cost.

The 100 Great Years perspective

Life insurance is not a financial product people enjoy thinking about. Its purchase requires confronting uncomfortable scenarios. But the financial consequences of being underinsured — or uninsured when dependants exist — are severe and irreversible. The framework is simple: does anyone depend financially on you? If yes, do you have cover sized to protect them for the duration of that dependency? If not, the gap between current cover and adequate cover is a financial risk sitting quietly in your plan. 100 Great Years treats insurance as risk management — not wealth creation, not investment, and not something to pay for beyond what the risk genuinely requires. Term life insurance, correctly sized, is one of the most cost-effective financial decisions available to people with dependants.

Insurance needs are highly individual and depend on your personal and financial circumstances. Please consult a qualified financial adviser or regulated insurance broker for guidance specific to your situation.

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This article is for educational purposes only and does not constitute financial advice. Past performance is not a reliable indicator of future results. Always consider your personal circumstances and consult a qualified financial adviser before making investment decisions.