Life Insurance - How much cover do I need?
Trying to organise your life insurance policy may seem like a daunting and complicated task, especially when you are unsure where to get started.
How much cover do I need? What policy is best suited to meet my needs? How long should the policy term be? What do I need to protect? Where should I purchase my life insurance policy?
It is important that we are able to answer all of these key questions to ensure our loved one’s financial future if we are no longer around to provide.
Life insurance companies offer a variety of policy types, each better suited to protecting different aspects of our lives, some of which are discussed in this post. However, the cost of the monthly premium can differ wildly between providers and so it is imperative that you compare multiple quotes.
You can compare quotes from the leading insurers completely free of charge by using an FCA-regulated broker such as Reassured or perhaps use a reputable comparison website.
Keep reading as we endeavour to answer the key question of ‘How much life insurance do I need?’…
What you need to cover
Your life insurance should cover key family financial commitments and other essential costs, including:
Your mortgage (average cost of around £140,000) to help keep loved ones in the family home and cover the repayments.
How much life insurance for a mortgage?
Paying off the mortgage is most homeowners' biggest concern, especially leaving the debt to your loved ones after you pass away. Investing in mortgage life insurance can leave adequate funds to help pay off your remaining family home mortgage debt and relieve the stress.
The cover amount (or sum assured) will depend on your remaining mortgage balance and term length. Mortgage life insurance is actually another term for a decreasing term policy and an ideal choice to help protect your mortgage.
Your sum assured can reduce in line with your remaining mortgage balance, and you can select a term which aligns with your mortgage term ensuring you are always covered.
You could also factor in household bills (an average of £1,500 a week) to help cover things such as council tax, gas, water, electricity, broadband, food shops etc.
It is also important to consider leaving adequate funds for the children in your family. Raising a child, on average, is calculated to cost £157,562 to the age of 18, as well as a potential further education fund; parents can expect to contribute over £5,000 per year to their children’s university living costs.
Knowing how much life insurance to get can be difficult; there are many aspects to consider. An example could be Outstanding mortgage + family living costs + funeral costs + university fees = sum assured.
What life insurance options are there?
Everyone’s situation is different; therefore, depending on what you want your policy to cover will depend on how much term insurance you will need.
There are two options:
1. Level Term life insurance
Provides a fixed (or level) payout if you pass away during the term. Level term provides a fixed payout sum that will cover you for a specified period of time (the term); it may be useful for meeting rising family living costs or interest-only mortgages. Similar to decreasing terms, if you outlive the term of your policy, it will expire, and there will be no payout.
2. Decreasing Term life insurance
Provides a payout that reduces over the policy's lifetime. Decreasing term life insurance is often used to help cover expenses such as a repayment mortgage. Therefore, the amount of coverage you need will likely depend on your remaining mortgage balance and how long your children have left until financial independence.
Because the financial risk to the insurer diminishes over time, decreasing term policies are usually cheaper than level term.
Whole of life Insurance
Whether whole-of-life insurance is a good option for you will depend on what you are looking to protect.
As the name suggests, it lasts for the rest of your life, which will relieve any worries about the ending of terms.
It also means you’re loved ones are guaranteed a payout when and not if you pass away. The payout will remain fixed throughout the policy term to help with any remaining debts; you may even wish to include an additional sum for an inheritance.
Please note because premiums need to be paid for life, and no one knows how long this will be, it is possible to pay more into the policy than it will pay out. So, not suitable for everyone.
Due to providing lifelong cover, the price you pay tends to be significantly more expensive; therefore, it can be well suited to those later in life who are still in good health.
Over 50' s
Once hitting the age of 50, typically, you may have fewer expenses to worry about than you did in younger years; for example, children growing up and mortgage debts lower (if any).
Therefore, you may not need to cover as much as you once did. An over-50s plan guarantees acceptance to those aged between 50 - 85. It is a popular choice within this age bracket to help pay for funeral expenses (currently, the average cost is £3,953) as well as a small inheritance.
Unlike the other policy options above, no medical questions are asked during the application process, and although a payout is guaranteed, the maximum cover amount is significantly lower (usually capped at £20,000)
5 Life insurance Top Tips
• Write your policy in trust free of charge to avoid or minimise the 40% inheritance tax
• Make sure to consider all your financial obligations – there is a policy perfectly suited to everyone, but it is essential to make sure you protect all aspects of your life, even future debts and factoring in rising inflation
• Although it is important to cover everything you would like to protect, taking out more cover than is required will result in you paying higher premiums than is necessary. Therefore, take your like to calculate your perfect sum assured. Reassured.co.uk has a useful life insurance calculator which can help you accurately calculate your sum assured
• Sharing assets with a partner may mean you might want to consider a joint life insurance policy. This can save you up to 30% on your life cover (although it will only offer a single payout)
• Factor in any cover protection you may receive from your employer (like death in service) to reduce your required cover amount (and therefore your monthly premium)
We never know when our loved ones may need life insurance, and no one knows what the future may hold. However, having cover in place provides a reassuring safety blanket for a worst-case scenario, and it may end up being the best investment you ever make.
This is a collaboration post with Reassured.co.uk