How much relevant life insurance do I need?

One of the first decisions you’ll need to make when arranging a relevant life policy is how much cover to take out.

There’s no single “correct” figure.

Some directors simply choose the maximum amount an insurer will offer. Others insure just enough to repay the mortgage and provide financial security for their family. The right level of cover depends on your circumstances, income, debts and long-term financial commitments.

If you’re new to relevant life insurance, start with our guide to what relevant life insurance is.

How insurers calculate the maximum cover

Relevant life insurance isn’t simply a case of choosing any amount you like.

Every insurer has underwriting limits that determine the maximum benefit they’ll offer.

These limits usually depend on:

• your age
• your remuneration
• the insurer’s underwriting rules

In many cases, insurers use a multiple of earnings to calculate the maximum available cover, although the exact calculation varies between providers.

Your remuneration may include salary and, depending on the insurer, dividends as well. We explain this in more detail in our guide to using salary and dividends as proof of income.

Should you take the maximum available?

Not necessarily.

Just because an insurer is willing to offer a certain level of cover doesn’t mean you actually need it.

A larger policy generally means higher premiums.

Instead, many directors start by asking a different question:

How much would my family need if I died unexpectedly?

That often leads to a more practical figure.

Start with your financial commitments

One way to estimate the right level of cover is to work through your major financial commitments.

These might include:

• your mortgage
• other outstanding loans
• children’s education
• household living costs
• replacing lost income
• funeral expenses

You may also want to leave a financial buffer to give your family flexibility while they adjust.

Think about replacing your income

For many families, the biggest financial impact isn’t a mortgage.

It’s the loss of future income.

If your company currently provides most of the household income, your family may need financial support for many years.

Some directors choose enough cover to replace several years of income.

Others prefer a larger lump sum that can be invested to produce future income.

There’s no universal formula.

Consider any existing life cover

Relevant life insurance doesn’t have to provide all of your protection.

You may already have:

• personal life insurance
• death in service benefits
• mortgage life insurance
• existing relevant life policies

It’s worth looking at your total protection before deciding how much additional cover is needed.

If you’re comparing different types of protection, see our guide to relevant life insurance vs personal life insurance.

Younger directors may need more cover

Age often changes the calculation.

Someone in their thirties with young children may have decades of future earnings still to come.

Someone approaching retirement may have:

• a smaller mortgage
• fewer financial dependants
• larger pension savings
• other investments

That doesn’t necessarily mean older directors need less cover, but the reasons for taking out the policy may be different.

Don’t forget inflation

A lump sum that looks generous today may be worth considerably less in twenty or thirty years.

Some insurers allow policies to increase automatically each year to help maintain their value over time.

Choosing this option usually increases future premiums, but it can help preserve the real value of the benefit.

Worked examples

Every situation is different, but these examples illustrate how directors often approach the decision.

Example 1

A 38-year-old IT contractor earns £110,000 through a limited company.

They have:

• a £320,000 mortgage
• two young children
• a partner who works part time

Rather than simply choosing the maximum available, they decide they want enough cover to repay the mortgage and provide additional financial security for their family.

Example 2

A 57-year-old consultant has nearly repaid the mortgage and the children have left home.

The main objective is now to provide a tax-efficient lump sum for their spouse rather than replacing decades of future earnings.

The level of cover needed may be lower than someone at an earlier stage of life.

Will more cover always mean higher premiums?

Generally, yes.

The premium is influenced by several factors, including:

• your age
• the amount of cover
• your health
• whether you smoke
• the policy term

The underwriting process also plays an important role. If you’re interested in how insurers assess applications, see how the underwriting process works.

You can also read more about relevant life insurance costs and premiums.

Can I increase my cover later?

Usually, yes.

Many directors review their cover when:

• buying a new home
• getting married
• having children
• increasing company profits
• taking on larger financial commitments

Increasing your cover may require further underwriting, depending on the insurer and the circumstances.

Is there a minimum amount of cover?

Most insurers have minimum policy values, although these vary.

In practice, relevant life insurance is normally used for more substantial levels of protection rather than relatively small policies.

Use a calculator as a starting point

If you’re unsure where to begin, a calculator can provide a useful starting point.

It won’t tell you exactly how much cover you should buy, but it can help you estimate an appropriate range based on your income and circumstances.

Try our relevant life insurance calculator before requesting quotations.

Frequently asked questions

Is relevant life insurance based on salary or dividends?

It depends on the insurer. Some providers consider salary alone, while others also take dividends into account when calculating the maximum available cover.

Can I take out more than one relevant life policy?

Yes, in some circumstances. We explain this in our guide to having multiple relevant life policies.

What if my income changes?

Your existing policy won’t usually change automatically, but you can review your cover if your circumstances change.
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