Life insurance can provide invaluable financial protection for your loved ones in the event that you die, but it isn’t always easy to work out exactly how much cover you need.
Not only must you think about ensuring your outstanding debts would be paid off, including your mortgage and any loans, but also how much cover you might need to pay for things such as childcare, school fees or higher education costs. And that’s all before you think about utility bills, council tax and day-to-day living expenses.
Affordability is also a major factor, as the bigger the pay-out you want, the higher your premiums will be. If affording the premium leaves you struggling to cope financially, you’ll have to reduce the level of cover you take out.
Mortgage protection insurance
Your mortgage is likely to be your biggest monthly outgoing, so if you are the breadwinner, you need to think about how your family would meet monthly repayments without your income.
Before buying cover, always check with your employer to see how much they will pay out in the event of your deaths
In most cases, this is likely to prove extremely difficult, but mortgage protection life insurance can provide peace of mind that your mortgage will be paid off when you die.
Mortgage protection life cover lasts for the same length of time as your mortgage. Most people with repayment mortgages go for decreasing life polices, which means the size of the pay-out decreases in line with your mortgage debt as it gets smaller over time.
If you currently have an interest-only mortgage, and are therefore only repaying the mortgage interest and not the capital debt, remember to include both capital and interest when working out how much cover your need.
Cover for other debts
If you have debts other than your mortgage (for example, you owe money on credit cards, or have personal loans), add them all up to ensure they are covered so that they can be paid off in the event of your death.
Life cover for your family
As well as your debts, think carefully about all your other outgoings that your family might struggle to pay for if you were no longer around.
For example, work out how much you might need to cover food bills and utility bills, as well as the cost of running a car.
Some financial experts suggest a minimum level of cover equivalent to 10 times your annual salary, but you might want cover nearer 15 or even 20 times your annual income if you have major outgoings and a large family to support.
Before buying cover, always check with your employer to see how much they will pay out in the event of your deaths. Companies typically pay death-in-service benefits equivalent to four times your salary, which would mean you wouldn’t have to take out quite as much life cover.
Don’t assume that if you aren’t working, you don’t need cover. For example, if you are a stay-at-home mum, you might think that you wouldn’t need life cover, because you aren’t contributing financially. However, remember that if your partner is working and you were no longer around, they would have to pay for childcare costs if they wanted to remain in their job.
It is possible to add critical illness cover to your life insurance policy, for additional peace of mind that your family would be financially protected if you suffer a serious illness and are unable to work.
Combining cover in this way can in cheaper premiums than if you were to take out two separate policies.
Critical illness insurance covers a range of specified illnesses, such as cancer and heart disease. Although all policies must by industry agreement cover a number of core conditions, most policies cover a wide range. It’s always worth checking the small print, however, to see exactly what protection the policy provides.
Bear in mind too that critical illness premiums will be more expensive than life insurance premiums because there is a much greater statistical risk that you will suffer from a serious illness at some point than you are to die before the age of 65.
Many people therefore limit the amount of cover they have to two or three times their salary, or the value of their mortgage.
The importance of regular reviews
Once you’ve taken out life insurance, don’t just stash the paperwork in a drawer and forget about it.
You should regularly review the amount of cover you have so that it still offers sufficient protection if your circumstances change. For example, if you move to a bigger property, have another baby, or get divorced, you may need to extend or reduce the cover you have.