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How much life insurance cover do I need?

Deciding what level of policy cover is right for you

Article author's profile picture
Written by  Rachel Ditchburn
10 min read
Updated: 20 Feb 2024

In this guide, we’ll explain the different reasons for needing life insurance and how to find the perfect cover for you.

Life insurance is more than just a policy; it's a safety net for your family's future. It's about ensuring that your loved ones are taken care of financially if you're no longer there to do so. Whether it's to cover mortgage payments, settle debts, or provide for your children's education, life insurance offers peace of mind that your family's financial well-being is secure. If you're unsure about the necessity of life insurance for your specific situation, it's worth reading our guide, 'Do I need life insurance?' for more information.

Life insurance is advisable if you have loved ones who depend on your income or your contribution to the household. It can cover costs and financial commitments such as credit cards, personal loans, car finance, other outstanding debts, household bills, and childcare costs. Life insurance is a good idea if you have a partner, children, joint financial commitments with someone, or caring responsibilities, and generally not needed if you are single and childfree.

Choosing the right life insurance policy

Life insurance isn't one-size-fits-all. There are different types of life insurance to suit various needs and budgets. From the more comprehensive whole-of-life insurance that offers a guaranteed payout whenever you pass away, to the more cost-effective term life insurance options that provide coverage for a specific period.

Whole-of-life insurance is described as the most expensive type because it pays out whenever you die, with the possibility of premiums rising during the term.

Types of term life insurance

  • Level Term: With level term life insurance, beneficiaries receive a fixed sum if the policyholder dies within the policy term. This type of insurance is generally cheaper when taken out at a younger age.

  • Decreasing Term: Decreasing term insurance is designed to cover debts that reduce over time, like a repayment mortgage. The payout decreases accordingly, making it a more affordable option.

  • Increasing Term: To combat the effects of inflation, increasing term insurance policies increase the potential payout over time, ensuring the policy's value remains relevant.

  • Family Income Benefit: A family income benefit policy provides a regular monthly income instead of a lump sum, aiding in the family's budget management.

Joint vs. single policies

For couples, the choice between joint and single policies is crucial. A joint life insurance policy may seem convenient, but it only pays out once, after the first partner's death. Two single policies, although potentially more costly, ensure that there are two separate payouts, providing additional security. Married or cohabiting couples can either buy two single life insurance policies or a joint life insurance policy, with an explanation that two single policies are often better as there are two payouts.

Couple sitting on the floor looking at a laptop

How much cover do you need?

Determining the right amount of life insurance cover is essential to avoid being underinsured or overpaying for unnecessary coverage.

Mortgage and debt considerations

When it comes to your mortgage, aligning your life insurance with the value and term of your mortgage can prevent over-insuring. For a repayment mortgage, our guide 'Do I need life insurance for my mortgage?' can offer detailed insights. Those with an interest-only mortgage should be mindful of inflation and interest rate fluctuations when determining their cover needs. Specific advice is given for covering mortgages, including setting the life insurance benefit to match the value of your mortgage and considering inflation and fluctuating interest rates.

Family and income protection

Calculating the cost of family expenses, from daily living costs to future milestones, is critical. If you're considering how to replace your income, a level term policy might be suitable for a lump sum provision, whereas a family income benefit can offer a steady monthly income. There is a detailed discussion on covering family expenses, including childcare costs, private education, and future expenses like university costs, weddings, and helping children buy their first home.

Funeral expenses

Funeral costs can also be covered by life insurance. Depending on your concerns about inflation, you might opt for an index-linked or whole-of-life policy to ensure these expenses are met. Funeral costs are discussed, with advice on selecting level term insurance or considering index-linked or whole-of-life policies to cover increasing funeral expenses.

Critical illness and over 50s considerations

For those with dependents relying on their income, adding critical illness cover to a life insurance policy can provide additional security. As you age, especially past 50, life insurance costs increase. A specialised over 50s policy might be a suitable option, though it's important to weigh the potential lower payouts and value. Critical illness cover is discussed as an addition to life insurance, with a note on the specific conditions covered and the option of income protection insurance.

Estimating your life insurance needs

To help estimate how much cover you might need, our life Insurance calculator can be a valuable tool. It takes into account your debts, desired inheritance, and existing policies to give you an instant estimate.

Reviewing and finding the best cover

Life is full of changes, and your life insurance should adapt accordingly. Regularly reviewing your policy ensures that it still meets your needs and allows you to explore potentially more suitable or affordable options. The article suggests reviewing your policy annually or after big life changes such as a new child, home purchase, marriage, divorce, health changes, or retirement.

When you're ready to secure your family's financial future, remember that finding the right life insurance policy doesn't have to be daunting. With our service, you can easily compare quotes from top UK life insurance providers to find a policy that offers great value and peace of mind. It's a simple step that can make all the difference for your loved ones.

Frequently asked questions

Can I cash in my life insurance policy?

Some whole-of-life insurance policies have an investment element and can be cashed in or surrendered before you die. But read the small print and take professional advice before you do this, as the surrender value of your policy may be significantly less than the amount you paid in premiums over the years. There could be a fee to cash-in your policy too.

You usually can’t cash in term life insurance policies.

How do you choose how much life insurance you need?

A quick way to calculate how much life insurance you need is to multiply your annual salary by the number of years you think your family would need financial support.

Another option is to add up your mortgage, debts, household bills and other expenses and work out how much your family would need a year if they didn’t have your income.

You might want to factor in future family expenses too such as university, weddings and deposits for your children’s first homes.

What’s the minimum amount of life insurance you need?

Life insurance isn’t a legal requirement and there isn’t a minimum amount of cover you are obliged to buy. However, as a minimum, many people aim to have enough cover to pay off their mortgage should they pass away unexpectedly – this would mean your family could continue to live in their home mortgage-free.

Do you need life insurance to get a mortgage?

It's a myth that you need to have life insurance to get a mortgage – you don’t. However, life insurance can help your loved ones pay off any outstanding mortgage in the event of your death, meaning they can stay in their home at what would already be a difficult time.

Is it cheaper to pay life insurance annually?

Most people pay life insurance premiums monthly. But you can also pay quarterly, every six months, or annually.

Some insurers offer a discount if you pay annually, so this can be a cost effective option if you have the cash available.

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