How much life insurance do you need?
Having a safety net in place for your family in case you die is an important part of financial planning. Taking out life insurance can provide your family with a payout when you die, but how do you work out how much cover you need?
A general rule of thumb is that you will need a policy which pays out at least 10 times your annual salary, but this can vary widely according to your individual circumstances. Here are a few costs that you should consider when deciding how much life insurance you need.
Your mortgage and debts
Your mortgage is probably your biggest and most important monthly expense, so you should consider how your partner would make the repayments if you weren't around. One option is to take out mortgage life insurance, which lasts for the same length of time as your mortgage and decreases over time, in line with your mortgage debt.
This means that if you die before your mortgage is paid off, your policy will pay out to help your partner cover the repayments. Remember that if you've got an interest-only mortgage, you'll need to account for the full mortgage balance as well as the interest repayments.
You'll also need to add up the cost of any outstanding credit cards, loans and other debts that would need to be covered by your policy.
How much does your family spend on food, utility bills and other living costs? Working this out is the next step in determining how much life insurance cover you need. You may also want to include an extra lump sum to cover unexpected expenses.
What is your time worth?
Of course, your value to your family is more than just your salary. If you spend time taking care of your children, you will need to consider the cost of extra childcare your partner would have to cover if you weren't around. Your partner would probably need to take time off work to grieve, so you may want to cover this too.
Once you've got an idea of how much your policy would need to pay out, it's time to find the right policy for you:
- Check whether your employer offers a death in service benefit; if so, you won't need to take out quite so much cover.
- Shop around: with so many providers on the market, comparing quotes can save you money and help you to find the best cover for your circumstances.
- Review regularly: remember to check that your policy is still right for you, especially if your circumstances change (for example if you have another baby or move to a bigger house).
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Last updated: 24 September 2015