Life insurance can bring invaluable peace of mind. You can't put a price on the sound knowledge that your loved ones will be financially secure in the event that you weren't around to provide for them.
The challenge is in trying to pinpoint how much life insurance you should buy. There are a variety of methods and formulas you could deploy, but how do you know which one makes most sense for you and your family?
One super-simple solution is to add up all your long-term financial obligations – for example, mortgage payments or university fees – and then subtract your assets. The remaining sum is the gap that your life insurance needs to fill.
The problem with this is that it doesn't account for the intricacies of your own set of circumstances. So, read on to find out how to calculate how much life insurance you need and what factors you should consider when doing your sums.
Life insurance in a nutshell
Life insurance is an insurance policy that pays out a lump sum on your death. It's also possible to buy life insurance that pays out a regular income, which could be useful if you have a young family.
Ultimately, having life insurance means your loved ones will be provided for and financially protected following your death.
Think about why you need life insurance
Before you can calculate how much life insurance you need, you first need to think about why you need it.
Depending on your situation, you may want life insurance to:
- Protect your family
- Cover your mortgage
- Secure your child’s education
- Pay outstanding debts.
If you’re the main breadwinner, you’ll want to make sure that any policy you buy will be enough to provide for your family if you’re no longer around.
Alternatively, if you’re the primary caregiver for someone who’s unable to look after themselves, a life insurance policy could help pay for hired help in the event of your death.
Should you own a business, you may want to ensure you have the right policy in place to help the company to continue operating in the immediate aftermath of your death.
Once you understand why you need life insurance, it’s easier to work out how much it should be.
Of course, you may not need to purchase any life insurance right now. If you don’t have anyone financially dependent on you, you may decide that saving or investing in other assets is more appropriate for the moment.
Work out how long you need your cover to last
There are a variety of different life insurance policies to choose from. What's right for you will depend on your reasons for wanting cover.
The first thing to decide when buying life insurance is how long you want your cover to last. You can choose a term life insurance policy that will last for a set period of time, or a whole of life policy to last the rest of your life.
Different types of term life insurance provide different types of cover.
- Level term – Gives you an unchanging level of cover and premiums for the entire length of your policy.
- Decreasing term – Provides benefits that decrease over time while your premiums stay the same, these policies tend to cost less than other types of life insurance and can be useful if you want to protect a repayment mortgage.
- Increasing term – Cover is regularly reviewed and increases over time to match inflation, and premiums will also increase over time.
- Family income benefit – Pays your beneficiaries a monthly income instead of a lump sum. Payouts will continue until the end of the policy term.
What to consider when deciding how much cover you need
The type of life insurance that’s right for you, including the amount of cover you need and how long for, will depend on your current situation. You need to consider the following areas.
Your age and the age of your dependents
This will help you calculate how many years of support you may need to provide. Remember, the older you are when taking out life insurance, the more you should expect to pay for cover.
Your current income
This can act as a useful guide to how much financial support you give your family now and help you understand how much they may need in the future.
Your investments and savings
These may provide valuable financial support to your dependents if you die earlier than expected. Depending on your wealth and the number of years you might need to support your family, if you have enough savings to cover their needs for a sufficient period, you may find that life insurance isn’t necessary.
Additional considerations include debt, education, and funeral expenses
Any outstanding debts may become your estate’s responsibility following your death. So, make sure you add these into your calculations.
Remember that education can be highly expensive. If your goal is to cover the cost of private school, college, or university, these costs can also be added to your life insurance.
Finally, funeral expenses will likely be passed to your family. Although there are alternative ways to ensure your funeral is planned and paid for in advance, this is another area you may wish to add to the amount of cover you buy.
Get in touch
Trying to figure out how much life insurance you need can feel overwhelming. If you want to ensure that you have the appropriate level of cover, we can help.
Email enquiries@alexanderpeter.com or give us a call on +44 1689 493455.
Please note
Life insurance plans typically have no cash-in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
