The amount of life cover someone needs is very much related to their own personal circumstances. Factors such as those below will influence how much life cover they should have:
• Spouse or partner
• Loans or debts
• Standard of living
• Existing life cover
• Death in service from employer
• Current savings and investments
• Future planned expenditure
It is generally accepted that if you have no partner or dependents then your need for life cover is very low. If you have mortgage then you may wish to cover this in the event of death as the cost is relatively low. However, there is no real financial need for this to be in place.
If you have dependents then life cover needs to be seriously considered. Cover needs to replace the lost income of the main earner.
Again, if you have a partner or dependents then covering the full mortgage in the event of death is essential so that they have a home to live in. Without this cover, should the mortgage payments be unaffordable your family will either have to sell the property or eventually it will be repossessed due to non-payment of the mortgage.
Loans or debts
Providing cover for loans or debts may depend on how much they cost. However, the cost of the life cover is likely to be quite low.
Standard of living
The amount of life cover needed is reflected by how quickly it will be spent! If your family has high annual expenditure and you wish this to be maintained then life assurance cover needs to provide for this.
Any calculations for the amount of life cover needed should include a provision for existing cover. These can be deducted from the overall total thus giving you a shortfall figure to cover.
Unless there are other plans for this money then these can be included as assets and can be deducted from the life cover shortfall figure.
Future planned expenditure
This is thinking ahead and could also be related to standard of living. If you intend your children to be privately educated then a provision needs to be made for school fees. Also, if you wish your children to go to university then additional money needs to be set aside for this.
Many advisers will take your annual salary and times by a factor of ten to establish the amount of cover needed. This does not accurately reflect all the points above. The only real way to calculate the amount of life cover needed is to work out a monthly/annual budget planner and then calculate the capital sums needed in addition. These would be university fees for example which will only be payable for a few years.
Let’s presume all mortgages have been repaid and you need £2000 per month income for your dependents. We could establish a Family Income Benefit (FIB) policy that will pay out £2000 per month until your youngest child is 21. Or we could provide a lump sum of £480,000 which when invested should yield 5% per annum. This annual yield figure can be adjusted downwards and so increases the lump sum initially required.
You will then need to decide whether the policy is a joint life policy, life of another or written under trust. These decisions should not be take lightly and we recommend speaking to an Independent Financial Adviser (IFA) for an expert opinion. An IFA can also source a competitive term assurance policy to suit your life cover needs.