Who needs life insurance?

by Neil Faulkner on 24 September 2009  |  8 comments
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We don't need as much life insurance as life insurers would like to sell us! Here's how to figure out whether you need it and how much you need.

Other than income protection insurance, which is probably the most important insurance many of us could have, life insurance is possibly the most undersold insurance. Well, that's not quite true. Actually it's oversold, but it's under-bought, and that's probably because sales tactics are so over-the-top.

The sorts of statistics life insurers scare us with claim that, in this country, 140 million of us require £8bn of life insurance each, but all we have is a fiver of insurance between us...

OK, that's a little bit of an exaggeration, but the figures they produce in their sales pitches and PR/propaganda can raise close to 140 million eyebrows.

Whilst they're using statistics like this to convince us that we really need this insurance or, if we've already got it, that we need a lot more, most of us just think: 'Yeah, and you really need your nice, steady monthly commission that the premiums will generate for you from now till I'm demented.'

Whilst we can't rely exclusively on industry statistics and what salespeople say, it is certainly true that many people put off the chore of buying this insurance till it's too late.

Who needs to take out life insurance?

The more unscrupulous salespeople would sell life insurance to your attic cobwebs, if cobwebs had any money. Yet your cobwebs don't need life insurance, because cobwebs have no dependants. Not even spiders are dependants. Spiders can produce more cobwebs all by themselves without insurers' financial support. It's no biggie to a spider when a cobweb dies.

You don't want to buy insurance you don't need. To avoid buying life cover you don't need, ask yourself a simple question:

If I die, will my family or loved ones miss my income or financial support?

That's the key question for most of us. If you can't think of anyone that you care about who depends on you financially or for other support (e.g. in the home), life insurance isn't for you.

To take an example: there's no need to pay for life insurance to pay off your mortgage when there's nobody who would benefit except your bank. We all have lots of other bills to face and our retirements to pay for, so let's not waste money on insurance that helps just our banks and insurance brokers!

The majority of people who need life insurance are parents of children who still require financial support. I mean both parents usually need it, because they both carry out a support role that would cost money to replace. If your partner earns an income, that income will need replacing, should the worst happen. If your partner doesn't earn an income but looks after the children full-time, you'll probably still want to insure your partner, because it's not cheap to hire a full-time nanny.

And it's not just children. It may be that you support others financially, such as a sibling or a parent. Similarly, your partner might partially or wholly rely on your income. Those people will need protecting. It's just a case of thinking who will be affected.

You can reverse that question, too: 'Do I depend on anyone else?' If the answer is 'Yes' and that person doesn't have life insurance to help you, you can take out life insurance on that person's life.

How much do you need?

I've heard of many rough guidelines to the amount of insurance you need. Some say that your life is worth about about ten times your annual income if you're the sole breadwinner. Others say that you're worth £20,000-£25,000 per year if you look after the children full-time. However, we're all different, as are our requirements.

If your partner has an income, you might not require so much insurance, for example. Do a few calculations based on what your dependants will need if you die tomorrow, including not just monthly house bills but also such things as future university costs for the children and pension contributions for your partner.

The payout is tax-free, but you may want some extra cover to pay off debts, because debts are paid from your estate before your benefactors get what's left.

I'm sure a financial advisor would help you decide on an amount, but you should ask why they suggest the amount they do. In the end, the amount you choose is your decision, not theirs. An alternative to professional advice is to ask a question using our Q&A tool, giving as much detail as you can to get better quality answers.

Even after you have bought life insurance, you will need to re-consider the total amount of cover as circumstances change. You may need to increase the insurance if you get a bigger home or have more children, or if higher inflation devalues your insurance. On the other hand, as your children get older and the mortgage shrinks, your family will need less financial support and for a shorter period of time, so you could reduce the cover.

One of the easiest ways to work out how much you need is to figure out how much you owe on your mortgage, if you have one. Take out enough cover to ensure the mortgage can be paid off immediately upon your death, and you'll ensure your loved ones always have a roof over their heads.

How long to insure yourself for?

This should be relatively easy to decide. You need to be covered for as long as people will be depending on you. This could be 18 years for children or, if you support your partner, it could be till you are due to retire. Again, if you're covering your mortgage, you need to take out cover for the full mortgage term. Find out more

What about the optional extras?

There are a few optional extras sold with life insurance, such as critical illness insurance. Before taking these up, I suggest you consider whether you have more important things to buy, such as income protection insurance.

Compare life insurance through lovemoney.com

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