Start with the obligations, not a multiple
The familiar rule of thumb — ten times salary — is a starting point rather than an answer. It takes no account of what a household actually owes, how long dependants would need support, or what is already in place.
A more useful method is to build the figure from the commitments themselves and then subtract what already exists.
- Outstanding mortgage and any other borrowing
- Income replacement: a realistic annual figure multiplied by the years it would be needed
- One-off costs such as education, or adapting arrangements at home
- Less: existing cover, death-in-service benefits and accessible savings
Decide how long, not just how much
A term running to the end of a mortgage is one benchmark. A term running until the youngest child is financially independent is often a longer and more relevant one.
Where affordability is tight, it is usually better to hold a realistic amount for the years of highest dependency than a token amount for decades.
Then consider the shape
A lump sum suits debts and one-off costs. A regular income, through family income benefit, is often easier for a household to plan around. Many families end up with a combination.
Whichever shape suits, the arrangement should be reviewed after any significant change — a move, a new child, a business change, or a change in health.