Term life insurance: Calculate the sum insured correctly
23 Jan 2026
10
Minutes
Katrin Straub
CEO at nextsure
The choice of the right insurance sum determines whether your family is financially secure in an emergency or faces ruin. By using the proven combination of gross annual salary and outstanding debt, you can accurately determine your individual needs.
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The topic in brief and concise terms
Use the basic formula: Add three to five times your gross annual salary to your total outstanding debts for a realistic sum.
Consider the duration: Protection should remain in place until the children are financially independent or loans have been completely repaid.
Optimize taxes: Use cross-insurance for large amounts or unmarried couples to keep the payout tax-free.
The classic rule of thumb: Income and liabilities
The foundation of any solid calculation is the current income. The common recommendation is to set aside three to five times the gross annual salary as a base. This buffer ensures that the survivors' ongoing living expenses are covered for several years, without the need for immediate drastic lifestyle changes.
Why use gross income? It serves as a simple indicator of the accustomed standard of living. For example, if you earn 60,000 euros gross per year, a factor of five results in a basic requirement of 300,000 euros. This amount covers rent, utilities, groceries, and insurance that continue after the main earner's death.
In addition to this income-based part, all existing loans must be added. This specifically concerns property financing. If there is still a remaining debt of 250,000 euros on your house, the insurance sum should be increased by exactly this amount. The goal is clear: In the event of a claim, the loan is immediately repaid, allowing the family to remain debt-free in their home. The formula is therefore:
(Gross annual salary x 3 to 5) + Remaining loan balance = Insurance sum
For self-employed individuals and freelancers, the calculation is often more complex. Here, not only private income should be considered, but also ongoing business expenses or the costs for a qualified succession plan if the company is temporarily unable to operate without the key person.
Individual factors: children, inflation and life stage
The general rule of thumb is an excellent starting point, but it needs to be tailored to your specific life situation. A key factor is the age of your children. The younger the offspring, the longer the period during which financial support is needed. Experts advise planning an additional buffer of about 50,000 to 100,000 euros per child to secure education costs or a future degree.
An often underestimated aspect is inflation. An insurance sum of 500,000 euros will have significantly less purchasing power in twenty years than it does today. According to data from the Federal Statistical Office, inflation rates fluctuate, but in the long run, they reduce the value of your coverage. At nextsure, we often recommend including a dynamic component. This means the insurance sum and the premium increase annually by a fixed percentage to offset the depreciation.
Consider also the existing assets. If mortgages are already paid off, savings are substantial, or there are claims from an occupational pension scheme, the insured sum of the term life insurance can be adjusted accordingly. It's not about being insured to the maximum, but to the right extent.
Checklist for your calculation:
What are the monthly fixed costs for the family?
What education costs will arise for the children over the next 10 to 20 years?
Are there funeral costs or inheritance taxes that will become immediately due?
What widow's or orphan's pensions can be expected from the statutory pension insurance?
Constant vs. decreasing sum insured: What fits when?
Not every life situation requires the same protection throughout its entire duration. Here, we distinguish between two main models, which have significant effects on the premium amount. The constant insurance sum remains the same over the entire contract period. This is ideal if you want to generally secure your family and the financial need remains stable over the years or even rises due to inflation.
The decreasing insurance sum (often referred to as residual debt insurance) reduces annually. This is the most economically sensible solution if you want to specifically secure a loan. As the remaining debt of your loan decreases with each repayment installment, the insurance protection adjusts to this progression. This saves premiums, as the risk for the insurer decreases over time.
Model | Suitability | Advantage |
|---|---|---|
Constant Sum | General family protection | Full coverage until the last day |
Linear Decrease | Linear amortizing loans | Lower premiums than constant sum |
Annuitized Decrease | Traditional mortgage loans | Precise coverage of residual debt |
At nextsure, we often see that a combination of both models is the best strategy. A contract with a constant sum secures the family's livelihood, while a second, decreasing contract is tailored precisely to the property financing. This way, you pay only for the protection you actually need.
The tax trick: The cross-insurance
A technical detail often overlooked in calculating the insurance sum is the inheritance tax. When the insurance payout is very large, the tax office can step in as soon as the payout is made to the beneficiary. Particularly for unmarried couples, the tax allowances are extremely low at just 20,000 euros. Although the allowance for spouses is 500,000 euros, this can be quickly exhausted with large property assets.
To prevent a significant portion of the insurance sum from being lost to taxes, a so-called cross-insurance is recommended. In this setup, Person A insures the life of Person B and is simultaneously the policyholder and premium payer. In the event of Person B's death, Person A receives the sum tax-free, as it is not considered an inheritance but a benefit from their own contract.
This arrangement does not affect the required sum itself but ensures that the calculated amount arrives net with the survivors. If you do not choose this route, you would theoretically need to increase the insurance sum by the anticipated tax amount, which unnecessarily raises the premiums. For us at nextsure, transparency also means addressing such strategic nuances early on.
Common Mistakes in Requirements Assessment
Despite simple rules of thumb, errors often creep in, which can be costly in the long run. One of the most common mistakes is underestimating childcare costs. If the parent primarily responsible for the children is no longer available, high expenses for external childcare or domestic help frequently arise, even if that parent did not contribute a direct income. Therefore, securing stay-at-home parents is essential.
Another mistake is choosing a term that is too short. Ideally, the insurance should last until the children are financially independent or the mortgages are fully paid off. Those who save here and choose a term that is too short might find themselves without coverage at 55, while obtaining new insurance could be unaffordable or even impossible due to age or health restrictions.
Also, don't forget the guarantees for coverage increases. Life rarely proceeds linearly. A wedding, the birth of another child, or purchasing a larger property can suddenly change your needs. Make sure your policy with nextsure provides options to increase the coverage amount without a new health assessment when such life events occur.
Conclusion: How to Secure Your Future Digitally and Precisely
Calculating the insurance sum for a term life insurance is not rocket science, but it does require an honest look at one's finances. The rule of thumb (3-5x annual salary + debts) provides excellent guidance. However, individual factors such as the children's age, inflation, and fiscal aspects like cross-insurance should be included in the final decision.
At nextsure, we support you in making this process as simple and digital as possible. Our goal is for you to not just take out any insurance but to get exactly the coverage that suits your life. Use modern tools for needs assessment and seek advice from experts if in doubt, to ensure your loved ones are optimally provided for in case of an emergency.
More useful links
Term life insurance: The best protection for family members provides information on this topic.
FAQ
What happens to the insurance sum if I pay off the loan faster?
With a decreasing insurance sum, coverage is reduced according to a fixed plan. If you repay more quickly, the insurance sum temporarily exceeds the remaining debt. You can usually adjust or cancel the contract to save on premiums.
Should both partners take out their own term life insurance?
Yes, this is absolutely advisable. Especially when both contribute to the household income or share childcare responsibilities. Mutual coverage (crosswise) is usually the smartest choice from a tax perspective.
How does smoking affect the sum insured and the premium?
Smoking has no impact on the required amount but has a massive impact on the premium. Smokers often pay double or even triple for the same coverage because their statistical risk of death is higher.
Is term life insurance worthwhile for singles?
For singles without relatives or business partners, it is usually unnecessary. It only becomes sensible when loans need to be secured, for instance when parents act as guarantors, or when a family is about to be started.
What is the difference between the insured sum and the payout amount?
The sum insured is the guaranteed amount. Due to bonuses from the insurer, the actual payout in the event of death may be slightly higher, but this should not be relied upon for planning purposes.
