How much life insurance do I need?

Choosing the right life insurance policy

To meet the growing diversity of consumer needs, insurance companies have developed equally diverse types of life insurance policy. They all work slightly differently and each one has its pros and cons. These are some of the most common examples:

Term life

This kind of policy covers you for a set period – usually 10, 20 or 30 years – and pays if you die within that time. Once your chosen period ends the cover stops and no money is paid out. Because of this, the premiums you pay are lower than some other types of insurance and it’s particularly useful for meeting time-limited obligations like mortgages.  

Whole life insurance

This covers you for the rest of your life, so as long as you keep up the premiums and meet the terms and conditions you can count on it paying out eventually. Like term life, the premiums are usually fixed although probably higher. It also builds up a cash value that serves as a form of investment. 

Joint life insurance

This covers partners or spouses, paying the survivor when the other insured person passes away. It’s usually cheaper than having two separate policies.

Critical illness insurance

This isn’t technically life insurance but it’s often bought as part of a life policy. It pays out while you’re alive, if you’re diagnosed with a serious or terminal illness as defined in the policy.

Level life insurance

The eventual payout and the premiums are fixed at the start, which makes it attractive to people who don’t want the cost to increase and are happy with a pre-determined sum.

Decreasing life insurance

The amount of cover decreases over time, which means premiums are relatively low. It’s not for everyone but it can work well for people whose priority is to cover financial commitments like mortgages and other long-term loans.

Increasing life insurance

As you’d expect, this is the opposite of increasing insurance. Both the amount insured and the premiums increase over time and it’s ideal if you’re concerned to keep pace with inflation and the cost of living. 

Family income benefit

This doesn’t pay a lump sum on the death of the insured. Instead, it makes regular payments to your beneficiaries, for as long as the policy lasts after you’ve passed way. For example, if you take out a 30-year policy and die after 15 years, it will pay out regular amounts for the next 15 years. These payments are tax-free.

How much life insurance cover should you get?

Everyone has different needs, but here are a few considerations to help you decide how to calculate life insurance.

Assets

Your current financial situation is a good place to start.

Income: for most people this is their most important asset, paying for all the day to day essentials and, with luck, leaving some over. What you earn is a fair guide to how much your dependants will need.

Savings: some people have a substantial amount saved, others very little. It’s worth factoring your level of savings into your calculations.

Investments: if you have any stocks and shares these can pay regular dividends if the vehicles you’ve invested in perform well. That can’t be guaranteed of course and their value can rise or fall significantly, but your dependants have the option of selling them.

Pensions: the funds in a private pension will usually pass to the beneficiaries you’ve named in your pension or into your estate and then distributed according to your will.

Group insurance cover: if you’re part of your employer’s group life insurance scheme and you die while still working for them your next of kin may receive a lump sum death in service benefit.

Even a rough calculation of the value in each of these assets will give you an idea of how much insurance you need both to maintain your family’s current lifestyle and to cover them in the future.

How do I calculate how much life insurance I need now?

Your family status will have an impact on how much cover you need.

Married, in a civil partnership or cohabiting: even if your spouse or partner has an income of their own, you may want to help them out, especially since living alone can be more expensive than living as a couple.

With children: if you have children who are under 18 then the loss of your income could be a big blow to them as they’re growing up. Once they’re adults, money from a life insurance policy could give them enough to raise a deposit for renting or buying a property.

Elderly relatives: your parents or other older relatives may have come to depend on you and even if the support you’ve given them so far hasn’t been financial, as they get older it might be important to provide money for care.

How much life insurance should I have for future costs?

You should also look beyond today, to include long-term and future costs.

Debts: mortgages and other debts will still need to be paid after you’ve gone, so getting enough insurance to cover them will avoid the burden falling on others and, in the case of a mortgage, keep your family home safe.

Education: if your children are among the 36% of young adults who go to university, which has become very expensive with the rise in tuition fees, money from your insurance policy could help pay for some or all of their time in higher education. 

Funeral costs: it’s not a pleasant subject, but funerals can cost several thousand pounds and it would be a relief for your family not to have to find the money at such a difficult time.

Inflation: the right kind of life insurance – increasing, for example – is a good way of protecting the finances of your loved ones from the effects of inflation.

Should I add income protection insurance?

Life insurance only pays out once you’ve passed away so it doesn’t give you or your family any protection while you’re alive. Yet illness and injury don’t have to be fatal to cause financial difficulty; that’s why it makes sense to protect yourself in case you get too sick to work and you and your family suddenly have to manage without your earnings. Income protection insurance does precisely that. It doesn’t have to be expensive and it can pay you a proportion of your normal income to cover periods of sick leave for up to 2 years. Find out what Eleos offers here.

Choosing the cover you can afford

Life insurance gives peace of mind and financial security but there’s no point in over-stretching yourself now for the sake of an uncertain future. It’s important to find insurance with premiums you’re comfortable paying. There are plenty of comparison websites that give you instant quotes and these are useful as a guide, but for a big decision like this it may be a good idea to talk to insurance companies directly. For example, you can personalise an Eleos life insurance policy online. If in doubt, you can always consult a professional financial adviser, although they will probably charge a fee.

Keeping your cover under regular review

‘How much life insurance do I need’ is probably the first question you’ll ask yourself, but the answer may not always be the same. Times change, circumstances change. A life insurance policy lasts for many years. The arrangements you make now might not be appropriate 5 or 10 years from now. That’s why it’s important to keep your life insurance under review, to ensure that at any time it still fulfils your needs. Your insurer is unlikely to have a problem with changes you may wish to make, provided you continue to comply with the terms and conditions. It may be worth checking the flexibility of a policy before you buy, but whatever cover you choose, make sure you keep it up to date.