Life insurance: working out how much, not which product

The question that gets asked backwards

Almost every conversation about life insurance starts in the wrong place. Someone asks which policy to take, and within ten minutes there is an illustration on the table showing projected values, bonus rates and a commitment lasting a decade or more. The question that actually decides whether the cover is any use, namely how large a financial hole your death would leave and for how long that hole stays open, has not been answered. Yet the product has already been chosen.

Reverse the order. Work out the number first. That number is a function of your household's obligations, not of what an insurer would prefer to sell or what a colleague bought last year. Once you know the number, and the number of years you need it for, the product choice narrows sharply on its own. Several of the more complicated options tend to disqualify themselves without you having to argue about them.

This article is about arriving at that number. It does not recommend an insurer, and it deliberately avoids quoting premiums, because prices depend on age, health, occupation, smoking status and country of residence. Any figure printed here would be stale and misleading by the time you read it.

What a life policy actually does, and what it does not

A life insurance policy is a conditional promise. You pay premiums; if the insured person dies while the policy is in force, and the cause is not excluded, the insurer pays a fixed sum to the people or entity named as beneficiaries. That is the entire mechanism. Everything else is packaging around it.

It is worth being equally blunt about what the promise does not include.

• It does not replace your income indefinitely. It pays a sum once. Whether that sum lasts depends on how large it is relative to the spending it must fund, and for how many years.
• It does not pay for illness or disability unless you have bought a separate benefit that explicitly says so. Someone who survives a serious illness but never works again receives nothing from a plain life policy.
• It does not pay if the policy has lapsed for non-payment, and lapse over a twenty-year term is far more common than buyers expect.
• It does not reliably pay where material health or lifestyle information was withheld at application. International supervisory standards place explicit weight on conduct through the sales process and on the information exchanged when the policy is taken out. Source^source

Life cover protects the people who depend on your income. It does not protect you. If you are single with no dependants and no shared debt, the honest answer may be that you need very little of it, or none, and that your money does more work elsewhere.

Term, whole of life, and the savings hybrid

Three broad shapes exist. A term policy covers a fixed number of years and pays only if death occurs inside that window; if you outlive it, nothing is returned, and that is not a defect, it is the reason it is cheap. A whole of life policy covers you until death whenever it happens, which is more expensive because the insurer is certain to pay eventually. A savings or investment-linked policy bundles a death benefit with a long-term savings component, and the cost of that bundling is usually opaque.

Sizing the cover first is what makes this choice tractable. If the hole is large but temporary, term cover is the natural fit. If the obligation is genuinely permanent, such as providing for a dependant with lifelong care needs, a permanent structure has a real purpose. What almost never follows from a sizing exercise is "buy a small death benefit attached to a fifteen-year savings contract", yet that is frequently what gets sold.

A four-part method for sizing the cover

Work through four steps in order. Do them on paper, in your own numbers, before you speak to anyone selling anything.

1. Replace the income for a defined number of years

Start from what your household actually spends each month, not from your gross salary. Salary includes tax, savings and your own personal consumption, none of which the survivors need to replicate.

1. Write down total monthly household outgoings.
2. Subtract the portion that is specific to you and would stop, such as your own commuting, your own phone plan, your own food and clothing. Be realistic rather than generous.
3. Multiply the remainder by twelve to get an annual figure.
4. Decide how many years that income needs replacing. This is usually the number of years until the youngest dependant finishes education, or until a surviving partner's own earnings could reasonably carry the household.
5. Multiply the annual figure by the number of years.

You can refine this by assuming the lump sum is invested and drawn down, which reduces the amount needed, or by adding an inflation uplift, which increases it. Those two adjustments tend to work against each other. For a first pass, straight multiplication is honest and understandable, and honesty beats false precision here.

2. Clear the debts that would otherwise transfer

List every debt that would still be owed the day after death, including any mortgage, personal loans, car finance and credit card balances. Add them.

Two cautions apply. First, check whether a mortgage already carries its own life cover as a condition of lending, because paying twice for the same protection is a common and expensive duplication. Second, check who is actually liable for each debt. A jointly held obligation and a debt in your sole name behave differently for the survivor, and the correct treatment depends on the lender's terms and the applicable law.

3. Add the one-off costs that arrive at the worst time

These are unglamorous and routinely forgotten.

• Funeral and, for many internationally mobile households, repatriation costs.
• Legal and estate administration costs, including obtaining whatever court documents are needed to release assets.
• Immediate living costs during the period when accounts may be frozen or inaccessible, which can run to several months.
• Relocation costs if the survivors would move country, including flights, shipping, school deposits and a rental deposit in the new location.
• School fees for the remainder of a committed academic year.

For internationally mobile families there is an additional consideration. Residence status for dependants is often tied to the sponsoring resident, so the death of a sponsor can create a deadline as well as a financial gap. The rules differ by emirate, by visa type and over time, so treat this as a question to verify with the relevant authority rather than an assumption to build on.

4. Subtract what you already have

This step is what stops people from buying twice.

• Employer-provided death in service cover, usually expressed as a multiple of salary.
• Existing individual policies, including old ones you may have stopped thinking about.
• Accrued end-of-service entitlement and any workplace savings arrangement, which for private sector employees sits within the labour framework administered by the ministry. Source^source
• Liquid savings and investments that could realistically be sold without wrecking a plan.
• A property that the survivors would genuinely sell rather than live in. If they would live in it, it is not an asset for this calculation.

The result of steps one to three, minus step four, is your indicative sum insured.

A worked example

Suppose a household has two earners. One earns 25,000 a month, the other 12,000. Total household spending is 28,000 a month. They have two children, aged six and nine.

Sizing cover on the higher earner:

• Household outgoings are 28,000. Roughly 5,000 of that is specific to the higher earner, so 23,000 a month would still need funding, which is 276,000 a year.
• The surviving partner earns 12,000 a month, or 144,000 a year, leaving a shortfall of 132,000 a year.
• The younger child is six, and the household wants the income gap covered for fifteen years, until that child finishes school. Fifteen years at 132,000 is 1,980,000.
• Outstanding debts are a car loan of 60,000 and a personal loan of 40,000, so 100,000. The mortgage already has lender-required life cover attached, so it is excluded.
• One-off costs are estimated at 150,000, covering repatriation, three months of buffer, relocation and the remainder of a school year.
• The subtotal is 2,230,000.
• Existing cover is employer death in service at three times salary, which is 900,000, plus accessible savings of 200,000, so 1,100,000.
• Indicative additional cover needed is 1,130,000.

Now size the lower earner. The temptation is to skip this, because the salary is smaller. That is usually a mistake. If the lower earner also provides childcare, the survivor faces a new and substantial cost that did not exist before. Run the same four steps for that person, and include the market cost of replacing the unpaid work, which is a real cash outflow even though it never appeared on a payslip.

Term length deserves as much thought as the sum

A common default is to pick a round number of years because it sounds sensible. A better rule is to work backwards from the last year in which a dependant is expected to rely on you, then add a small buffer.

If your youngest child is six and you expect them to be financially independent at twenty-two, the dependency window is sixteen years, so an eighteen or twenty year term gives you margin without paying for decades you do not need. Where the need declines predictably, such as a repayment mortgage, some buyers use decreasing term cover, where the sum insured falls over time in line with the balance. It costs less than level cover precisely because the insurer's exposure shrinks.

Two structural options are worth knowing about. Guaranteed renewability lets you extend cover later without fresh medical underwriting, which matters because your health at forty-five is unknown at thirty. Convertibility lets you switch a term policy into a permanent one without re-underwriting. Neither is free, but both buy optionality against the risk that you become uninsurable.

Where employer cover fits, and where it stops

Group death in service cover is genuinely valuable and usually cheap or free to the employee. It also has three properties that people forget.

1. It ends when the job ends. Resignation, redundancy and relocation all switch it off, typically with no continuation right.
2. It is set by your employer, not by you, and can be reduced at the next renewal without your agreement.
3. It is generally a multiple of salary, which bears no relationship to your household's actual obligations.

Treat it as a discount on the cover you need, not as a substitute for owning cover in your own name. A household whose entire protection plan depends on one employer's group scheme has a plan that can be cancelled by someone else.

Reading a savings-linked proposal without being dazzled

If you are shown a plan that combines life cover with long-term savings, the sizing exercise you have just done gives you a sharp diagnostic question. Ask what the death benefit is, then ask what a standalone term policy of the same sum insured, same term and same insured person would cost. The difference is what you are paying for the savings wrapper and its distribution.

Then ask, in writing:

• What are the total charges over the life of the contract, expressed in money rather than percentages?
• What happens to the value if you stop paying in year two, year five and year ten?
• Is there a surrender penalty, and how long does it apply?
• Is any projected return guaranteed, and if not, what happens in the downside scenario?
• How is the person selling this remunerated, and over what period?

Supervisory frameworks internationally expect product costs and features to be disclosed clearly enough for a buyer to make an informed decision. Source^source You are entitled to that clarity, and a refusal to put the answers in writing is itself informative. Separately, confirm that the insurer and the intermediary are licensed to operate where you are, which for the UAE means checking against the Central Bank as the supervisory authority. Source^source

Underwriting, disclosure and the claim nobody sees

The most expensive failure in life insurance is not overpaying. It is a declined claim at the moment the family needs the money, and the usual cause is non-disclosure at application.

Disclose fully: medical history, medication, family history where asked, smoking or vaping in any amount, hazardous hobbies, travel to high-risk regions, and anything else the questions cover. If a disclosure results in a higher premium or an exclusion, that is an honest, priced, enforceable contract. A cheaper policy built on an omission is not a contract, it is a coin flip that your dependants will lose.

Two related housekeeping items are worth doing on the day the policy is issued.

• Name the beneficiaries explicitly and keep the nomination current after any marriage, divorce, birth or death. A policy paid into an estate can be slower and more contested than a policy paid to a named person.
• Understand how estate distribution works where you live, because it can depend on the deceased's religion and on whether a registered will exists, with different courts and free zones applying different frameworks. Verify the current position locally rather than assuming that a rule you read about applies to you.

Reviewing the number

The sum you calculate today is correct today. It is wrong after most major life events, and it drifts quietly with inflation in between.

Recalculate when any of these happen: a birth, a marriage or divorce, a house purchase or sale, a significant change in income, a change of country, a job change that alters group cover, or a dependant becoming financially independent. Absent any of those, a review every two or three years is enough to catch drift.

The direction of travel is often downward. As debts amortise, savings accumulate and children approach independence, the hole your income would leave gets smaller. Cover that made sense at thirty-five may be more than you need at fifty-five, and reducing it is a legitimate outcome of a review rather than an admission that you got it wrong the first time.

What to write down

Keep a single page, stored where your family can find it, containing the sum insured, the insurer, the policy number, the term end date, the premium and payment date, the named beneficiaries, and the location of the policy document. Add the date you last recalculated the number and the assumptions you used.

That page is worth more than the brochure. It is the difference between a family that knows a policy exists and a family that never claims on one.