Deciding whether you need a life insurance policy in the first place can be a difficult enough decision but how do you decide how much to cover yourself for? How much is enough?
As a rule of thumb, some people suggest that you should multiply your annual salary five to ten times to make sure you have enough cover. So if you earn £20,000 a year, you should think about insuring yourself for £100,000 to £200,000.
However, this is just guesswork – the cover you need will depend on how much money your family/dependents will need after you’re gone. It pays to be accurate because you don’t want to pay over the odds for cover you don’t need, yet at the same time you don’t want to short change your loved ones at a time when they will need it the most.
Here are three steps you should take to determine the amount of cover that you’ll need:
Evaluate your current needs
What does it cost to run your household? Make sure you calculate mortgage/rent payments, utility bills, grocery spend etc. and don’t forget to add any outstanding debt into the mix, such as anything you may owe on a credit card.
A life insurance payout could cover your entire debt, as well as immediate costs such as funeral expenses but you might also want to cover ongoing standard of living costs for your family.
If you add all this together you’ll get a good idea of just how much you might need.
Consider the future
If you have young children, and you want to make sure they have a good education then this is something you’ll need to factor in. University can be expensive, so adding in the cost of tuition fees and living expenses to your policy can be a great help if you aren’t around in the future to support your family financially.
Don’t forget to calculate possible inflation costs too. Just because something costs £50 now, doesn’t mean it will cost the same in 10 or 20 years time
Calculate available resources
So you’ve worked out the total amount that your family are likely to need after you’ve passed away. Now to work out what other money will be available to them.
What is your partner’s income? Is this likely to change after your death i.e taking on extra childcare responsibilities?
Do you have any death in service benefits? Some employers will pay up to 4 x your annual salary if you die whilst working for their company.
Do you have any savings pots, either long-term or short term? What about pensions or investments?
If there is additional income from any of these sources then this can be taken off the total needed giving you a more accurate figure for how much to cover yourself for.
Here’s a quick calculation as an example:
Outstanding Mortgage Debt: £100,000
Outstanding Credit Card Debt: £5,000
Estimated future costs (Education etc) £30,000
Estimated funeral costs £3,000
Cash lump sum for dependents £100,000
Total required: £238,000
Death in Service Benefit £80,000
Savings Pot £10,000
Amount of Cover: £148,000
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