How much life insurance do I need?

May 27, 2013 at 10:59 pm Leave a comment

Most of us understand the importance of life insurance, but not many people find it easy to work out how much cover they need. Insurers usually set minimum and maximum payouts, but there is plenty of flexibility in between for the customer to create tailor made policies. So how do you make sure your life insurance will provide for your family?

The amount of cover you require will obviously depend on your own individual circumstances. For example, if you have one teenager and live in a rented flat, you won’t need as much cover as someone with several young children and a big mortgage.

You should also remember that the bigger the payout, the bigger the premium. In other words, the level of cover will to some extent be determined by your monthly budget as there is no point in arranging a policy if you cannot afford to pay the premiums.

 

Mortgage protection life insurance

The mortgage is often the household’s biggest expense, and most people want their life insurance policy to pay off the debt. Otherwise your family could struggle to keep a roof over their heads after your death. You can buy life insurance simply to cover your mortgage, sometimes called mortgage protection life insurance. And if you have a repayment mortgage, you might want to consider decreasing term assurance, so the size of the payout gets gradually smaller over the term in line with your shrinking mortgage debt.

Borrowers with an interest only mortgage should remember to include both the capital and interest when they calculate the total debt. It’s also worth checking whether you already have any mortgage cover in place – and if so, whether it is adequate

Cover your debts

Do you have any other debts? Perhaps you took out a personal loan to buy a new car, or maybe you have several credit cards. You should add up any other borrowings so that your family is not left with debts to pay in the event of your death.

Life insurance to cover your family

Children are expensive – as any parent will tell you. So your life insurance policy should provide for any childcare expenses, such as school fees or university costs, both now and in the future. The family will have enough to cope with after your death, without the complication of changing schools or giving up on further education.

You must also arrange enough insurance to cover day-to-day living expenses, such as food and energy bills, if the family can no longer rely on your salary. Many experts recommend a sum equal to ten times your annual salary, but you might settle on a figure closer to 25 times your annual earnings, especially if you are the main breadwinner and you have several young children.

It’s a good idea to find out if your employer would pay anything to your family if you died while you were still on the payroll. Some companies pay death in service benefits of about four times your annual salary, which would limit the amount of life cover you would need to buy.

Critical illness cover

Many people choose to add critical illness cover to a life insurance policy so that their family would receive a lump sum if they were diagnosed with one of a list of specified serious illnesses, such as cancer or a stroke. All policies must cover seven core conditions, though some include up to 100. But the definitions vary from insurer to insurer so it is vital to read the small print carefully for any restrictions and exclusions.

The amount of critical illness cover you need is probably pretty similar to the amount of necessary life cover. However, critical illness insurance is usually more expensive than term assurance because there is a greater likelihood of a claim. You might therefore want to limit the amount, perhaps to the size of your mortgage, or maybe two or three times your annual salary.

Life insurance: the never ending story

Don’t forget regularly to review your life insurance policy as your personal circumstances are likely to change over time. You might, for example, have another baby, move to a bigger house or even get divorced, all of which could have an impact on your cover.

 

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