Life insurance: how much do you really need?
Don't underestimate the importance of life cover. Here's how to work out exactly how much you need.
A life insurance policy worth $201 million - around £120 million – has been taken out by an unnamed billionaire in the US, making it the most valuable life insurance policy ever.
The billionaire has chosen to remain anonymous in order to ensure his benefactors keep working hard, as well as to protect them from Inheritance Tax.
According to reports, arranging the policy took seven months and involved 19 different insurance companies. The Guinness Book of World Records undertook a three month audit to confirm it is indeed the most valuable policy ever arranged.
Thankfully, arranging life insurance isn’t that difficult for most of us. And while we won’t be taking out such massive amounts of cover, we do need to take our time to work out exactly how much cover we actually need.
Under-covered
Around one in three UK adults have a life insurance policy, according to LV=, but many people don’t buy enough, leaving their dependents with a shortfall. Equally, you don’t want to over-insure and end up paying out for something which won’t be used.
So how do you work out the correct amount of life insurance to go for?
Life insurance
A life insurance policy will pay out money – either a lump sum or regular payments – when you die.
There are two main types of life insurance. Term life insurance pays out for a fixed period, say 20 years, and only pays out money if you die within the term of the policy. The other type of life insurance is a whole-of-life policy and this pays out whenever you die.
Not everyone needs life insurance; it’s only really necessary for people with dependents, such as children or a partner.
It provides peace of mind, should the worst happen. However, there are other types of insurance – such as critical illness and income protection – which can give you protection if you lose your job through an illness, for example.
Easily find out how much a new life insurance policy will cost, and what it will cover.
Get a free, no-commitment quote from the lovemoney.com life insurance store today >
Your monthly outgoings
There is no set amount of protection as it all depends on your individual circumstances.
The first thing to work out is exactly what your monthly budget is, including all debts and expenses.
This needs to include everything you spend money on – such as mortgage payments, credit card debts and basic monthly outgoings. Other things to include are one-off costs such as paying for your funeral and children’s university fees.
Going through your bank statements from the past three to six months should give you an idea of the size of your regular outgoings and alert you to any spending you may have overlooked.
Existing policies
There’s a good chance you already have some sort of life cover in place, provided by your employer, so work out how much you’re entitled to if this is the case. Read Death in service: how much life insurance does your job pay?
The amount of cover you need to buy will be your employer's life cover subtracted from the total cover you have worked out that you need.
When picking the policy you’re going to buy always shop around as quotes are likely to vary quite a bit. A comparison tool, such as ours on lovemoney.com, is a good place to start.
Once you’ve got your policy in place you also need to keep it updated as your circumstances change, such as if you have more kids or take on a bigger mortgage.
If your circumstances have changed, then it could be the ideal time to shop around for a better policy. You should compare both the cost, and what a new policy might cover.
How long should it last for?
There are a few options when deciding how long you need cover for.
You can either take one out which will last until your expected retirement age or you can set one up to end at a certain time, such as when your children are (hopefully) no longer financially dependent on you.
There is also the option of keeping the policy in place until a loan, such as your mortgage, is paid off.
Single or joint?
Couples often choose a joint life insurance policy but these only pay out once – so a surviving spouse will be left unprotected.
Getting two single life polices is a better idea as this eradicates the problem and lets each person get a policy which is tailored to their lifestyle. It’s much better value for money getting two policies as it costs roughly the same amount but the joint policy will only pay out once.
Write your policy in trust
When you get a life insurance policy it’s worth getting it written ‘in trust’, as it will protect the payout from Inheritance Tax.
If you are thinking about taking out or renewing a life insurance policy, then you can easily find out the potential costs and cover involved using Lovemoney.com's life insurance store.
Get a free, no-commitment life insurance quote today >
More on insurance:
What happens to your money after you die?
Make a successful claim on your critical illness insurance
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