Who needs life insurance?
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.
You don't want to buy insurance you don't need. To avoid buying life insurance 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.
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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.
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.
Get the best deal on your life insurance with lovemoney.com
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 life insurance for the full mortgage term.
Get the best deal on your life insurance with lovemoney.com
More on life insurance:
Women paying 20% more for life insurance
The insurance most of us should resolve to have in 2014
How to get the best life insurance policy
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Comments
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even at more chronolically gifted ages, insurance can have a role. At 60 we took out a term policy on my wife's life that would pay a large sum to our two children if she died within 20 years. It was written in trust so its outwith our estates. We can now make a succession of gifts to them knowing that should we die before the 7 year period has elapsed that they will have money to compensate for any IHT the estate will have to pay. It means that we do not have to leave ourselves short - you never know what the future will bring. I work on the basis that life's a bi**ch.
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I would recommend term life insurance for folks over 45 if you can get the same deal we did about 9 years ago. My wife's payments were £18 per month for £50,000 upon death. If you do that by direct debit, you forget that it's even coming out of your bank. Sadly, the deals nowadays pay off 2 or 3K for the same monthly payment.
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I suppose it is all about risk at the end of the day. At 18 I was oblivious to the need for life insurance. Looks like the man from Norwich Union managed to convince my dad to splurge on paying for a policy for me though!! Like you say the cost is not that different. Forr me, I'm glad my dad did take out the policy as I imagine my premium would have been extremely high had I purchased it later. Regarding the lack of dependants, is there not a facility to put the policy 'in Trust' for the benefit of parents/siblings/charity/neighbour etc? That way they can pay for your funeral and the rest can go to someone you may actually care about, rather than down the pan.
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17 February 2014