Life Insurance: How Much do you Need?

Thinking about life insurance is something that many people don’t like doing. It’s not easy to think about your own mortality and the fact that you won’t always be around, but making provisions for your family should the worst happen is one of the most vital things that you can do today. Thankfully, the process can be quick and extremely painless.

A study carried out in 2011 showed that around 33% of Americans had taken out a life insurance policy, whilst just over half of workers were covered through their employers. Without the protection afforded by life insurance, their families could have financial heartache to cope with, in addition to grieving for the departed.

What do I need life insurance for?
Most mortgage lenders make it a stipulation that life insurance has been taken out before funds are released. This way, should you die prior to the conclusion of the mortgage term, your loved ones will not have to worry about paying off the mortgage as it will have been taken care of. Similarly, even though your employer or pension provider may include a death in service grant as part of your package, it usually won’t be enough to cover a mortgage, so additional life cover will be necessary.

How much cover is necessary?
Working out how much cover you need is going to take some thought; a quick ready reckoner suggests that between 7 and 10 times your annual salary should suffice, but digging deeper into your finances will uncover a more precise answer.

If you would prefer your family to live off the interest made from your life insurance settlement, your level of cover will be far higher. For example, if your salary is 45,000, having cover which will pay out 450,000 will cover 10 years’ salary. If you would prefer your family to “earn” your 45,000 salary each year in interest, allowing for a long term interest rate of 4%, your cover will need to be worth over 1 million. Of course, interest rates may fluctuate over time and the lump sum may need to be dipped into by your family.

A more measured approach may be to plan out future likely expenses over a certain period of time. Expenses such as paying off the mortgage, covering university costs for your children, any outstanding debts, the cost of the funeral and your salary for a number of years will give you the amount of cover you are likely to need. Of course, the lump sum will accrue interest whilst in the bank, but will not last forever. In addition, should your partner be able to continue to work, or resume once your children are at an appropriate age, the amount of cover may need to be reduced.

The bare minimum amount of cover needed should be enough to pay off any debts that you currently have, such as mortgage or car loans as well as paying for funeral expenses. This way, your family don’t need to worry about money in the short term whilst still grieving your loss.

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