This is a difficult question and one that most of us need to ask when considering how much life insurance cover to purchase.
The answer will always be a combination of factors.
You should be able to list how much your annual income is. If you receive bonuses, tips, commissions or overtime then you might have to estimate a figure based on previous years income.
Some of that income may exist irrespective of whether you are alive or not. Banks automatically pay interest into accounts. Shares continue to pay dividends.
So having identified how much income is relative to you staying alive, you then need to estimate how much living costs would be saved if you were dead. There is the food you eat, the cloths you buy, transport and equipment directly related to your work. Any regular medical expenses you may have or opticians and dental check ups. Other costs that are special to you such as supporting your local football team or gym membership.
You should be able to arrive at a figure which gives what you bring in and what is spent only on yourself. That will give you a net cash value you add each year to the family.
Then there is the time you spend on DIY, looking after the car, cleaning the house, cooking meals, acting as home nurse, acting as taxi driver or just being with the children. You will no doubt be able to list many things that if you were not there to do them would no get done. So how many things on that list are necessary and would need to be still done if you were not there. Out of that list how many would your family have to pay to be done. Try to add up an annual cost for paying for those items to be done.
Now look at your debts. Each year you service those debts by paying interest and making regular monthly repayments. The annual service of debts should be covered by your income, but if you were to die then your creditors may expect immediate settlement of the outstanding debt. That is not something you would normally expect to fund in any one year.
Check how many of those debts already come with their own life insurance and how many are not covered by life insurance.
You now have an amount you need to clear the outstanding debt amount. You have the amount the family would suffer if you were no longer earning less what you send on yourself. You also have the value of the time and effort you put in for the family.
The amount to clear outstanding debts is a one off figure. The other two are on going. So how long should you multiply then by? There is no easy answer to this question. The answer will vary from one person to another.
If you have children then they will probably need to be supported to at least their eighteenth birthday and possibly beyond. If you leave a partner it may depend on whether they are working. Even if they do work, does their work require you also to help out with the children? If you were not there then would that prohibit the kind of work they could do or the hours they could work. You may think you need to cover your partner up to your or their retirement age.
Whatever number of years you select then that is the figure you should multiply the two ongoing income/costs streams you need to cover.
Add the above amount to the amount of outstanding debt and you come up with a starting figure to work on.
You then need to consider if that is sufficient bearing in mind inflation and other factors. You may find the answer is much more simple. You just buy what life cover you can afford until you and your family feels comfortable.
The author is Alan Knight who has more than 35 years of experience working in the life insurance sector.