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How much life insurance cover do I need?

Here are a few things to consider when you're working out how much cover you need to support your loved ones.

Updated 20 May 2020  | 2 min read

Key points

  • To work out the right level of cover, consider debts and outgoings as well as your dependants’ essential needs
  • Critical illness cover can also be bought alongside life insurance
  • Review your cover level if your circumstances change

Life insurance is about providing for the people who depend on you if you die prematurely. It provides money to pay for things like mortgage, debts or other outgoings normally paid for by your income.

For most people, life insurance is about protecting dependents from financial hardship in the event of early death. This might be your own children, a partner who relies on your earnings or a family living in a house with a mortgage you pay, such as a former partner.

It’s not easy to picture your life without you in it - but to take out life insurance, you’ll need a rough idea of how much your dependents would need to cope without you. The life insurance policy should be enough to replace your income plus a little extra to cover inflation.

Evaluating your insurance needs

To work out how much insurance you need, make a note of all your debts. This includes the outstanding balance of mortgage(s), loans, credit cards and expenses that would be payable on your death, such as funeral costs.

Then you need to work out the cost of all the outgoings you pay for - rent, bills, food, clothes, and other essentials required until your children are old enough to take care of themselves. This may include childcare costs, school fees or university tuition fees, as well as extras such as holidays and extracurricular lessons.

Level term or decreasing life insurance?

Life insurance comes in two main forms: level term life insurance and decreasing term life insurance. Level term life insurance means you choose a pay-out value and length of policy cover. If you die during the term of the policy, your dependants receive the specified lump sum.

Decreasing term life insurance reflects the fact that outgoings tend to decrease as time goes by - for example, your debt reduces as you pay off a mortgage, or your costs to care for children reduce as they start school or leave home. With this form of insurance, the payout reduces the longer you live.

Many people buy critical illness cover either alongside or as part of their life insurance. This means you get a payout if you’re diagnosed with a critical illness which prevents you from being able to work.

Calculating the right level of cover

Once you have a clear idea of your debts and outgoings, you’ll be in a better position to calculate the level of cover that works for you. This isn’t a one-size-fits-all solution, as families come in many shapes and sizes.

Equally, choosing the length of term you’d like to cover will depend on your situation. It might be that you want cover to last until your mortgage is paid off, or until your children reach adulthood.

Other things to consider

A very rough rule of thumb is that you need cover worth about 10 times the salary of the highest earner in the household. The amount should be enough to maintain a similar standard of living for your loved ones. But this needs to be balanced against the amount you can afford to pay in premiums - the higher the payout amount, the higher your premiums will be.

You should also remember to factor in any other policies that provide cover. Some employers provide ‘death in service’ insurance, or you might have an existing life insurance policy you wish to supplement.

There’s no limit to how many life insurance policies you can hold, so you could buy an additional policy or opt for another form of cover such as critical illness insurance.

Review your cover regularly

Insurance has to be the right fit for your circumstances - if your life changes, your cover should too. Review your cover regularly, for example in the case of having another child, a relationship breakdown or purchasing a new home.

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