Term life insurance: calculate the sum assured correctly
23.01.2026
10
Minutes
Katrin Straub
Managing Director at nextsure
Choosing the right sum insured determines whether your family is financially protected in an emergency or faces financial ruin. Using the tried-and-tested combination of gross annual salary and outstanding debt, you can precisely determine your individual needs.
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The topic in brief and concise terms
Use the basic formula: Add 3 to 5 times your gross annual salary to your total remaining debts for a realistic sum.
Consider the term: The cover should remain in place until the children are financially independent or loans have been fully repaid.
Optimise tax: For large sums or unmarried couples, use cross-insurance to keep the payout tax-free.
The classic rule of thumb: income and liabilities
The foundation of any sound calculation is current income. The general recommendation is to use three to five times the gross annual salary as the starting point. This buffer is intended to guarantee the surviving dependants’ ongoing living expenses for several years, without the need for immediate, drastic cuts to their standard of living.
Why gross income in particular? It serves as a simple indicator of the standard of living the person is used to. For example, if you earn €60,000 gross per year, a factor of five gives a basic requirement of €300,000. This amount covers rent, utilities, food and insurance, which will continue even after the death of the main earner.
In addition to this income-based portion, all existing loans must be added. This applies in particular to property financing. If there is still €250,000 outstanding on your house, the insurance sum should be increased by exactly this amount. The aim is clear: in the event of a claim, the loan is repaid immediately so that the family can continue living in the family home debt-free. The formula is therefore:
(gross annual salary x 3 to 5) + outstanding loan balance = insurance sum
For self-employed people and freelancers, the calculation is often more complex. In this case, not only private income but also ongoing operating costs or the cost of qualified succession planning should be taken into account if the business 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 must be adapted to your specific personal situation. One key factor is your children’s age. The younger the children, the longer the period over which financial support will be needed. Experts recommend allowing an additional buffer of around 50,000 to 100,000 euros per child to cover education costs or later university studies.
An often underestimated aspect is inflation. A sum assured 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 over the long term they reduce the value of your cover. At nextsure, we therefore often recommend including indexation. This means the sum assured and the premium increase each year by a fixed percentage to offset the loss of value.
Also take existing assets into account. If you already own mortgage-free property, substantial savings or entitlements from an occupational pension scheme, the sum assured for term life insurance can be reduced accordingly. The aim is not to be insured for the maximum amount, but to be insured according to your needs.
Checklist for your calculation:
What are the family’s monthly fixed costs?
What education costs will arise for the children over the next 10 to 20 years?
Are there funeral costs or inheritance taxes that would be due immediately?
What widow’s or orphan’s pensions can be expected from the statutory pension insurance?
Constant vs. falling sum insured: what suits when?
Not every life situation requires the same level of cover for the entire term. Here, a distinction is made between two main models, which have a significant impact on the premium amount. The constant sum assured remains the same throughout the entire term of the policy. This is ideal if you want to provide general financial protection for your family and your funding needs remain stable over the years or even tend to rise due to inflation.
The falling sum assured (often referred to as decreasing term cover for loan protection) decreases annually. This is the most economical solution if you want to protect a loan specifically. As the outstanding balance of your loan decreases with each repayment instalment, the cover adapts accordingly. This saves premiums, as the insurer’s risk decreases over time.
Model | Suitability | Benefit |
|---|---|---|
Constant sum | General family cover | Full cover until the last day |
Decreasing linearly | Linear repayment loans | Lower premiums than a constant sum |
Decreasing annuity-based | Standard property loans | Precise cover for the outstanding balance |
At nextsure, we often find that a combination of both models is the best strategy. A policy with a constant sum protects the family’s living expenses, while a second, decreasing policy is tailored exactly to the property financing. That way, you only pay for the cover you actually need.
The tax trick: cross-insurance
A technical detail that is often forgotten when calculating the sum insured is inheritance tax. If the sum insured is very high, the tax office can take a share as soon as the payment is made to the beneficiary. In particular, for unmarried couples, the allowances are extremely low at just €20,000. For spouses, the allowance is €500,000, but with substantial property assets this is quickly used up.
To prevent a significant part of the sum insured from being lost to tax, the so-called cross-insurance arrangement is a good option. Here, Person A insures the life of Person B and is at the same time the policyholder and premium payer. In the event of Person B's death, Person A receives the sum tax-free, as it is not an inheritance but a benefit under their own policy.
This structure does not affect the amount required itself, but it ensures that the calculated sum also arrives net with the dependants. If you do not choose this route, in theory you would have to increase the sum insured by the expected tax amount, which needlessly drives up the premiums. For us at nextsure, transparency also means addressing such strategic manoeuvres at an early stage.
Common mistakes in needs assessment
Despite simple rules of thumb, mistakes often creep in and can be costly in an emergency. One of the most common mistakes is the underestimation of childcare costs. If the parent who primarily cared for the children is no longer there, there are often significant costs for external childcare or domestic help, even if that parent did not contribute any direct income. Protecting stay-at-home mothers and fathers is therefore essential.
Another mistake is choosing a term that is too short. Ideally, the policy should run until the children are financially independent or the property loans have been fully repaid. Those who try to save money here and set the term too short may end up at 55 without cover, while a new policy becomes unaffordable or even impossible because of age or health limitations.
Also, do not forget the guaranteed insurability options. Life rarely follows a straight line. A wedding, the birth of another child, or the purchase of a larger property can change your needs suddenly. Make sure that your tariff at nextsure offers options to increase the sum insured without a new medical examination when such life events occur.
Conclusion: This is how to secure your future digitally and precisely
Calculating the sum insured for a term life insurance policy is not rocket science, but it does require an honest look at your own finances. The rule of thumb (3-5x annual salary + debts) offers an excellent guide. Nevertheless, individual factors such as the children’s ages, inflation and tax aspects such as cross-insurance should be taken into account in the final decision.
At nextsure, we support you in making this process as simple and digital as possible. Our aim is for you not just to take out any insurance policy, but to receive exactly the protection that suits your life. Use modern tools to assess your needs and, if in doubt, seek advice from experts to ensure your loved ones are optimally provided for in the event of a claim.
More useful links
Term life insurance: The best protection for dependants offers information on this topic.
Literature
FAQ
What happens to the insurance sum if I repay the loan faster?
With a decreasing sum insured, the cover reduces according to a fixed schedule. If you repay more quickly, the sum insured may temporarily be higher than the remaining debt. You can then usually adjust or cancel the policy to save on premiums.
Should both partners take out their own life insurance policy?
Yes, that is absolutely advisable. Especially if both contribute to the household income or share childcare. Reciprocal cover (cross-insurance) is usually the most tax-efficient choice.
How does smoking affect the sum insured and the premium?
Smoking has no influence on the amount required, but a major influence on the premium. Smokers often pay double or triple for the same cover, as their statistical risk of death is higher.
Is term life insurance worthwhile for single people?
For singles without dependants or business partners, it is usually unnecessary. It only becomes worthwhile when loans need to be secured, for which, for example, parents act as guarantors, or when starting a family is on the horizon.
What is the difference between the sum insured and the payout amount?
The sum assured is the guaranteed amount. Thanks to the insurer’s profit-sharing, the actual payout in the event of death may be somewhat higher, but this should not be relied upon when planning.
