How much life cover do I need?

The amount of life cover someone needs is very much related to their own personal circumstances. Factors such as those below will influence how much life cover they should have:

• Spouse or partner
• Dependants
• Mortgage
• Loans or debts
• Standard of living
• Existing life cover
• Death in service from employer
• Current savings and investments
• Future planned expenditure

It is generally accepted that if you have no partner or dependants then your need for life cover is very low. If you have mortgage then you may wish to cover this in the event of death as the cost is relatively low. However, there is no real financial need for this to be in place.

Dependants

If you have dependants then life cover needs to be seriously considered. Cover needs to replace the lost income of the main earner.

Mortgage

Again, if you have a partner or dependants then covering the full mortgage in the event of death is essential so that they have a home to live in. Without this cover, should the mortgage payments be unaffordable your family will either have to sell the property or eventually it will be repossessed due to non-payment of the mortgage.

Loans or debts

Providing cover for loans or debts may depend on how much they cost. However, the cost of the life cover is likely to be quite low.

Standard of living

The amount of life cover needed is reflected by how quickly it will be spent!  If your family has high annual expenditure and you wish this to be maintained then life assurance cover needs to provide for this.

Existing cover

Any calculations for the amount of life cover needed should include a provision for existing cover. These can be deducted from the overall total thus giving you a shortfall figure to cover.

Current investments

Unless there are other plans for this money then these can be included as assets and can be deducted from the life cover shortfall figure.

Future planned expenditure

This is thinking ahead and could also be related to standard of living. If you intend your children to be privately educated then a provision needs to be made for school fees. Also, if you wish your children to go to university then additional money needs to be set aside for this.

Many advisers will take your annual salary and times by a factor of ten to establish the amount of cover needed. This does not accurately reflect all the points above. The only real way to calculate the amount of life cover needed is to work out a monthly/annual budget planner and then calculate the capital sums needed in addition. These would be university fees for example which will only be payable for a few years.

Let’s presume all mortgages have been repaid and you need £2000 per month income for your dependents. We could establish a Family Income Benefit (FIB) policy that will pay out £2000 per month until your youngest child is 21. Or we could provide a lump sum of £480,000 which when invested should yield 5% per annum. As a safeguard, this annual yield figure can be adjusted downwards and so increases the lump sum initially required.

You will then need to decide whether the policy is a joint life policy, life of another or written under trust. These decisions should not be take lightly and we recommend speaking to one of our Financial Planners for an expert opinion. Our advisers can source a competitive term assurance policy to suit your life cover needs.

Buy life cover when you are young

Pure life cover or term assurance policies are fairly simple things. You pay a set amount each month for a set amount of cover over a set amount of years. At the end, the policy and premiums stop, simple. Term assurance policies provide only pure life cover so there is no investment element or policy cash value.

The one aspect of life cover that does change is the cost. Life assurance companies regularly review how much they charge according to their own mortality statistics, profit margins and market share.  All life cover costs rise as we get older, unfortunately we are more likely to die as each year passes. You also have the added risk of illnesses. If you were to suffer a serious illness then it could be nearly impossible to buy life cover, or the premiums would be so high as to make it unaffordable. No one knows what’s lurking around the corner.

However, with a term assurance plan with guaranteed premiums, once you have taken out the plan then the premiums are guaranteed and fixed for the life of the policy.

So it does pay to take out a policy sooner rather than later as each year the cost of buying a term assurance plan will rise. However, it is important to buy death cover for the right reasons, what’s the use of paying for something that you don’t really need?

• If you have a mortgage then generally you will want this to be repaid on death
• If you have a family and dependents then you may wish to provide additional funds for them
• If you have a business you may want to cover any business loans or Keypersons

Term assurance policies come in a few different styles such as Level Term Assurance, Mortgage Protection, Renewable Term, and Convertible Term. You also have extra options such as waiver of premium and critical illness cover.

To make sure you get the right life cover for you it would be best to seek advice from an experienced financial planner. These advisers have the knowledge and experience to set up a policy that is suited for your needs and budget.