How much life cover do I need?

Life cover is a necessary outgoing for most of us, especially if you have a family; we all know how expensive children can be. I have heard some people use a rule of thumb of 10 times salary, which to me, is far too general. That’s just plucking a number out of the sky and has no bearing on an individual’s personal circumstances. When calculating your life cover requirements, follow these steps:

Step 1 – What is the net income that needs to be replaced

The main purpose of life cover is to replace lost income. So, what is the net income that needs to be replaced?

Let’s use an example and say Hugh dies. He had brought home a net income of €5,000 a month.

Step 2 – Deduct mortgage repayments

A condition of getting a mortgage is that you take out mortgage protection cover so the mortgage is paid off in the event of death during the mortgage term.

Hugh paid €1,000 a month to the mortgage. That was always money you didn’t have to spend and it’s gone now, so you now need to replace €4,000 a month.

Step 3 – Are there any State benefits payable?

If you are entitled to a Widow(er)’s pension, you will receive €193.50 a week plus and additional €29.80 a week for each qualifying child. This can be used to replace lost income.

Hugh and his wife, Barbara, had 2 kids, so Barbara receives €1,097 a month from the State. This further reduces the income to be replaced down to €2,903 a month

Step 4 – Additional child care costs?

Child care is a major cost for young families in Ireland with creche fees costing up to €1,000 a month. If the surviving spouse continues to work, they will probably have to factor in additional child care costs.

In our example, we add in another €500 a month, bringing the cost up to €3,403.

Step 5 – One less mouth to feed

There being one less person around will reduce costs but not by as much as you think. Remember, the cost of a light being on is the same regardless of there being 1 or 10 people being in the room. There will be savings on food, clothes, cost of running a second car etc but you may have to hire a cleaner to help with the additional workload. For that reason, I would be hesitant to reduce income requirements here.

Step 5 – Comfort Money & Funeral Costs

Having your “other half” die suddenly is a very traumatic event and even more so if there are children involved. You may want to take your kids away for a while or you may take a few months off school to help your kids adjust to this big change in your lives.

There is also the cost of the funeral. These can be expensive affairs, depending on what you are looking for.

In the case of Hugh and Barbara, let’s say €10,000 for the funeral and €40,000 comfort money.

Step 6 – Are there any short term debts that need to be paid off?

Are there any car loans or home improvement loans that need to be paid off in addition to the mortgage debt, which is covered separately? Monthly repayments are a cost and it is better if they are paid off in full.

Hugh had €5,000 left on a car loan.

Calculating how much life cover is required

We have calculated that we need to replace a monthly income of €3,403 and we need a lump sum totalling €55,000.

The simplest way of calculating the lump sum required is to multiply the monthly requirement by the amount of months until retirement age (this assumes investment returns and inflation cancel each other out). For a 40 year old, this amounts to cover of €1,020,900 to replace lost income, giving a total required level of cover of €1,075,900.

People can be concerned if their loved ones come into such a large amount of money, especially if they are not financially savvy. There is always a risk that they might mismanage the money or spend it too quickly. Some insurance companies will provide the life cover payments as a monthly income, so if you need €3,403 a month, that is what they will pay out. You can also get paid a lump sum payment for your comfort money. I recommend that you use this method so you do not have to take investment risk with a large lump sum.

Go through this process when calculating how much life cover you require and you will come to an accurate figure. The cost of the cover depends on your age, smoker status, term of the policy and your health.

If you have any questions, you can contact me directly at