Life insurance: how much cover do you need?
Ensure loved ones have financial protection without paying over the odds
Few people like to think about dying but if you have a family or other dependents, buying life insurance could safeguard their financial stability if the worst happens.
Handing over cash each month for insurance can seem like an “unnecessary expense”, said MoneySuperMarket, but these policies offer “a way to care for the ones you love when you are no longer there to do it yourself”.
However, “whether you should have it, what policy to get, and how much cover you need” is less clear-cut, said MoneyWeek, so you need to ask some key questions.
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Who needs life insurance?
Getting life insurance is probably a good idea if you have financial dependants “such as children or a partner”, said MoneyWeek.
“Even when they are grown up,” MoneySuperMarket added, “a life insurance policy will ensure that you continue to leave something behind for them to help them out in life”. As well as replacing lost income and helping to fund living and education costs, life insurance payouts may pay off your mortgage, and could even cover funeral and inheritance tax costs.
And even if you are single and childless, and have no other financial dependants, the payout from a life insurance policy could be used for other things that matter to you, such as charitable donations or taking care of pet.
How much cover do you need?
When deciding how much cover to get, consider your family situation, the size of your mortgage and how many people are financially dependant on you.
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“The more protection your life insurance policy offers, the higher your premiums are likely to be,” said Confused.com. So you need to balance getting enough cover with not “paying for too much”.
According to some experts, ten times your gross annual salary is “a good starting point” for cover levels, said Forbes, “although this might rise to 15 or even 20 times if you have major outgoings or a large family”. Consider how any dependants “would be able to keep up with childcare costs, energy bills, council tax, as well as food bills, car costs, and any other expenses that would allow them to maintain their current standard of living”.
Before making any final decisions, “also check what provision your employer makes for the event of your death”, said MoneyWeek. Many companies offer a death-in-service benefit "that will pay your family a lump sum between double and quadruple your annual salary” if you die while in their employment.
What are the types of life insurance?
The vast majority of life insurance sold in the UK is term-life, which runs for a fixed period. The policy pays out if you die during the term, so, essentially, the insurer is betting on you staying alive so that it gets to keep your premiums.
By contrast, whole-life policies last until you die, so the bet is about when that happens. If you die at a younger than expected age, the insurer will have to pay out a guaranteed lump sum that is likely to be more than you paid in premiums. But if you live for a long time, the insurer keeps collecting your premiums.
If you opt for term-life insurance, you choose between level, decreasing and increasing term cover. Level term premiums “are usually fixed and the cover amount stays the same” regardless of when you die, said NerdWallet. The cover amount doesn’t adjust for inflation, so may be worth less over time.
With decreasing term cover policies, the premiums are also fixed and are usually lower than those for level cover. But the cover amount drops over time, “in line with what you owe on a repayment mortgage or other long-term loan”, the personal finance site continued. “So the lump sum would be larger at the beginning of the policy than near the end.”
Some insurers offer the option to protect the lump sum from the effects of inflation. The cover amount is linked to a measure such as the consumer prices index or retail prices index, to reflect rising costs. As your cover amounts increases, your premiums usually will too, usually up to a maximum amount.
Other life insurance options include over 50s cover, which is a type of whole-life policy, and joint life, which covers two people under one policy, with the payout going to the surviving partner.
Whichever you choose, consider putting your life insurance policy in a trust. Otherwise, said MoneyWeek, “when you die the payout is classed as part of your estate, so could be liable for inheritance tax”.
Taking out a life insurance policy is fairly straightforward. “You can compare policies on price comparison sites and take one out online, as you would for car insurance for example,” said Unbiased.
But, the website cautioned, it may be worth speaking to a financial adviser to make sure your preferred policy is "well suited to your needs and financial situation”.
Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously written for FTAdviser, ThisIsMoney, The Mail on Sunday, and MoneyWeek.
Marc Shoffman is an NCTJ-qualified award-winning freelance journalist, specialising in business, property and personal finance. He has a BA in multimedia journalism from Bournemouth University and a master’s in financial journalism from City University, London. His career began at FT Business trade publication Financial Adviser, during the 2008 banking crash. In 2013, he moved to MailOnline’s personal finance section This is Money, where he covered topics ranging from mortgages and pensions to investments and even a bit of Bitcoin. Since going freelance in 2016, his work has appeared in MoneyWeek, The Times, The Mail on Sunday and on the i news site.
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