Let’s face it no-one wants to pay more for their life insurance than is necessary. Most would rather spend our hard-earned money on the more fun things in life.
Having said that, most of us know how important having life insurance is, especially if you have children who depend on you and a mortgage.
- What would happen if you were no longer around?
- Could your partner afford the mortgage repayments?
- How would you finance future living costs?
- Would your partner need to return to work?
- If so, who would look after the children?
- Could you afford childcare fees?
These are all really difficult questions to answer, and the reality is many people choose to ignore them.
As a general rule, the more life insurance cover you take out, the higher your monthly premiums will be.
But how do you know how much life insurance you need?
We asked award-winning life insurance broker Reassured to run through the key considerations, ensuring your loved ones are protected but that you are not paying unnecessarily high premiums.
Mortgage repayments (this is a big one)
For most of us, purchasing a property is likely to be our single largest investment. The average UK mortgage debt is £121,687 (source: The Money Charity).
As a result, when calculating how much life insurance cover you need you should factor in your remaining balance and how long you have left on your mortgage term.
It is generally a good idea for your life insurance to at least cover the remainder of your mortgage. This ensures if the worst were to happen to you, your family could remain in their home.
To cover a mortgage, the most suitable, cost-effective policy option is decreasing term cover. This is designed to cover a repayment mortgage because the sum assured can be set to decrease in line with your outstanding balance.
If you rent your property, then you would need to consider the long-term rental costs.
We all know running a home isn’t cheap! According to research from More Than, the average annual running cost of a 3-bedroom house is £1,634 (and the costs only ever seem to continue rising!).
Therefore, it is a very good idea to consider ongoing (often unavoidable) household expenses, such as:
- Property maintenance
- Council tax
- Content insurance
- Household appliances.
Family living costs
Obviously, your personal living costs will be strongly influenced by:
- How many children/dependants you have
- The age of your children (or how long until they are financially independent)
- Where you live
- Your lifestyle
- Leisure activities
- Children’s education.
Think about both your current and future living expenses. For example, if your children are likely to go to university, you may need to factor this into your calculations.
This may or may not affect you. If it does, think about your level of personal debt.
Do you have debts you would rather not pass onto your family, like car finance, personal loans or credit cards.
If so, the remaining balance should be factored into your cover amount.
Provide an inheritance
Depending on whether you have personal savings or not, you may want to provide an inheritance as well as pay off your mortgage and personal debt.
If you do want to leave some money to your children or grandchildren you may want to factor this into your cover amount.
Writing your policy in trust can ensure the sum assured is paid to your loved ones instead of being used to clear debts (although any remaining debt will need to be deducted from your estate in this instance).
Depending on your age, funeral costs may or may not be an obvious consideration when working out how much cover you need. However, no-one can ignore the astonishing rise in the cost of dying.
According to research from SunLife, the average cost of a basic funeral has increased by +122% since 2004. And the projections indicate the costs will continue to rise at a rapid rate.
The average cost of a funeral is currently £4,271 and the total cost of dying, with all associated costs, is £9,204!
Not many people have these funds lying around, and so if you are unable to afford these fees, your loved ones either miss out on a proper send-off or they foot the bill themselves.
Another opinion, if you only have funeral costs to consider, is a prepaid funeral plan. This allows you to lock in today’s rates and is paid directly to the funeral director, reducing stress for your family.
Inflation & the rising cost of living
As we all know the cost of living over time generally rises. So what your life insurance pay out is worth today may be very different to what it is worth in real terms when a claim is made.
As a result, it is a good idea to factor in the rising cost of living and inflation into your cover calculations.
Some people enjoy cover protection through their employer, such as death in service benefit. It is common for this to equate to approximately 3x your annual salary.
To ensure you do not take out more personal protection than you require and pay unnecessarily high premiums, factor in your employee coverage.
One thing to understand though is that this cover with not travel with you if you move to a new employer.
Policy type and term length
Some policy types cost more than others. For example, decreasing and level term (both forms of life insurance) tend to be cheaper than over 50s plans and whole of life (forms of life assurance).
The difference is life insurance only pays out if you die during the set term, whereas life assurance pays out when you die.
If you opt for a term based policy pay attention to policy length. Generally speaking the longer the term, the higher the premium – simply because a claim is statistically more likely.
Compare life insurance quotes
Once you have run through all the above considerations you will be in a great position to work out how much life insurance you need.
That is the end of the process right? No.
Different insurers use different underwriting processes, therefore the prices you are quoted can differ wildly.
The best way to ensure you secure the right policy, at the best monthly premium, is to compare multiple quotes.
You can do this yourself online, however, this can be very time-consuming and many comparison websites only compare a small panel of insurers.
Alternatively, you can use an FCA registered broker, like Reassured, to do the hard work for you.
And the best bit, our award-winning service is completely free to use.