Follow this topicLife Insurance: How Much Do You Really Need?
Don’t under estimate the importance of life cover. Here’s how to work out exactly how much you need.
Life insurance really isn’t the most cheery topic of conversation. In fact, you might not even like to entertain the notion of your early demise. But sometimes you need to think -- and plan for -- the unthinkable.
Ask yourself are there people in your life who depend on you financially? If there are, then life insurance is an absolute must. And it’s just as important that you get the right amount of cover too. This is not a decision to be taken lightly, so how do you do it?
People often make the mistake of only buying enough life insurance to pay off their mortgage. But protection needs often go far beyond that.
Just take a look at the table below. It should give you a much better idea of the costs you need to include when you gauge how much life cover you really need:
Calculating life insurance
Costs in the event of your death | Example |
|---|---|
Outstanding mortgage | £150,000 |
Other outstanding debts (loans, credit cards etc) | £20,000 |
Funeral Expenses | £5,000 |
Total one-off payment required | £175,000 |
Your partner/family’s ongoing living expenses | |
Monthly living expenses (household bills, food, running a car etc) | £2,200 per month |
Child care costs (if applicable) | £0 |
Your partner’s estimated net monthly income | £1,350 per month |
How many years do you need cover? | 20 years |
Other insurance/assets | |
Death in Service benefits | £90,000 |
Other life insurance policies | £0 |
Sellable assets | £0 |
Life insurance shortfall | |
Total one-off payment required | £175,000 |
Total shortfall in partner’s income to meet living expenses | £204,000 (£10,200 pa shortfall over 20 yrs) |
Total | £379,000 |
Deduct other insurance/assets | £90,000 (Death in Service benefits) |
Total Life insurance required | £289,000 |
Remember the example shown is just that -- an example. You’ll probably need to adapt it to suit your own circumstances.
I mentioned earlier that many people only buy life cover for their mortgage -- so, using the same figures -- you might be tempted to buy just £150,000 worth of cover, rather than the £289,000 you actually need. That’s a shortfall of £139,000.
How long do you need life insurance for?
In the example above, the amount of life cover has been calculated on the basis that the policyholder needs cover for a 20-year term. But how long will you need cover? There’s a number of ways to work that out, but one of these following methods are fairly typical:
• You could take out a policy which lasts until you reach your expected retirement age of say 65 or,
• You could have cover in place until your children are no longer financially dependent on you. This might be when the youngest is 18 or 21 or,
• You could keep the policy until your mortgage, loans and credit cards are completely paid off and you’re debt-free. You might then want to consider reducing the level of cover you have to suit your changing financial situation.
Adapting your cover
Working out how much protection you need --and for how long -- should be an ongoing process. When your circumstances change you need to think about upgrading your policy. For instance, if you have more children, you move to a larger home and take on a bigger mortgage, or your living expenses increase significantly, it’s sensible to think about extra cover.
A non-working partner
If one partner stays at home to look after the kids, there’s still a need to insure their life even though they don’t earn a salary. Child care doesn’t come for free, so think about getting enough life insurance to cover these costs if the stay-at-home parent was no longer around.
Don’t over-insure
Nobody likes to pay for something they don’t need and over-insuring your life is no different. Working through the calculation should give you a pretty good idea of how much cover you need.
Don’t forget to deduct any life insurance policies you already have and Death in Service benefits that might be available through your employer. Death in service often provides a payout of three or four times your salary, so that can be quite a sizeable chunk to knock off the total protection you need.
Get a quote
And finally, once you’ve weighed up how much cover you need and for how long, your next step is to compare life insurance quotes to find a competitive policy. Try The Motley Fool Insurance Service to help you with that today.
More: An Easy Way To Save 65% On Your Life Insurance | Visit The Motley Fool Insurance Service
The comments above are the opinions of the author only and do not represent advice specific to your circumstances.
This article has been approved and issued by Direct Life & Pension Ltd who are authorised and regulated by the Financial Services Authority.
The Motley Fool Insurance Service and The Motley Fool Life Insurance is a trading style of The Motley Fool Limited. The Motley Fool Life Insurance is provided and administered by Direct Life & Pension Services Limited. The Motley Fool Limited is an introducer appointed representative of Direct Life & Pension Services Limited, who are authorised and regulated by the Financial Services Authority. Registered office: Pinnacle House, A1 Barnet Way, Borehamwood, Hertfordshire WD6 2XX.
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