The first step is to establish how much life insurance cover you will need, and for what purpose. Will your family need full financial support after you die? Do you wish to arrange for your mortgage to be paid off, or your children’s university education be paid for?
Perhaps you wish to ensure your business partner can survive the upheaval caused by your death
Looking at the issue of life insurance realistically, you should insure yourself for as much as you can afford!
However, calculating the life insurance you need to settle your debts is relatively easy – assuming you know how much you owe, then that is the amount of life insurance you should insure for.
The tricky part is calculating the amount of life insurance you need to ensure your loved ones are looked after once you have gone. We have tried to make the assessment much easier by preparing this step by step guide.
What are the immediate cash needs likely to be?
If you died tomorrow, how much cash do you think your family would need to see them through the next few weeks?
For example, they will need enough cash to cover funeral expenses and to settle any debts, such as personal loans, store and credit cards. There are also the everyday bills and expenses, such as milk and papers, telephone, gas, electric….etc.
Having calculated a lump sum figure for immediate needs, deduct any savings which are readily available in cash.
How much life insurance will be needed by your family?
Assuming that you have an income, either from a job or a pension, you now have to assess the level of life insurance you would need to replace that income on your death.
- Start with your take home i.e. your pay after the deduction of national insurance and tax. You must then add to this sum any extra monthly expenses that your family will incur after you have died, such as the additional cost of childcare. You have now arrived at the gross monthly income your family will require.
- You need to ascertain what state or bereavement benefits your family may be entitled to on your death. Information on state benefits paid to a family following bereavement is available from Direct Gov websites and the Department of Work and Pensions.
Any expenses, which no longer continue after your death, should be deducted. For example, your mortgage repayments will finish following your death assuming of course that you already have a Mortgage Protection plan in place to protect it. Other expenses, such as travelling to work, should also be deducted. You are left with the rough amount per month, which your family will require to replace your income.
How long will the life insurance be needed for?
The annual figure is arrived at by multiplying the above figure by 12 and then by the years your family will need cover. The latter figure may be the number of years before your children become fully independent or your partner retires for example.
Calculate the base amount
The two sums of money you have calculated should be added together.
Take into account your existing life cover
Deduct any life insurance cover on your life provided by your employer, or any life insurance you may have, which is not being used to cover anything else, such as a mortgage. This sum is the approximate amount needed to protect your family if you die.
The final figure may give you a bit of a shock. For example, say your calculations indicate that your family requires £3,000 in the immediate future and £1,000 each month for 20 years, then £243,000 is the total amount of cover required. (£1,000 x 12 x 20 + £3,000)
That £243,000 just provides your family with life insurance protection and does not include Mortgage Protection Insurance.
This cover may be more than you can afford, but do not worry, just insure yourself for what you can afford. Some cover is better than nothing…..and remember that it is best to start when you are young and fit, as the premiums will be cheaper.
If you are unsure about the type and amount of cover you need, please do not hesitate to contact us and speak to one of our Independent Financial Advisor for expert advice. Please ring 0845 070 4235.
Request a Quote