Things to consider when calculating your cover
There are a few things to consider when deciding how much life insurance cover to purchase. Here are TotallyMoney’s top things to consider when calculating how much cover you and your family require.
Consider why you are purchasing life insurance
If you are purchasing life insurance simply to repay your outstanding mortgage debt in the event of your death, you should buy enough cover so that they payout will repay the mortgage in full. Decreasing term insurance policies do exactly this, and your insurance broker will be able to advise how much cover you require based on the size of your mortgage.
If you are purchasing life insurance in order to provide for your family after your death the matter becomes slightly more complex, and you should take various things into consideration such as the size of your debts, the size of your current income and how much you can afford.
How much debt do you have?
If your family is dependent on your income, you should purchase enough cover so that any payout will repay your secured debts, including your mortgage. If your family is unable to meet your debt repayments after your death they could lose their home, as those debts are secured against the house. Lenders could force the sale of the house in order to recoup unpaid debts, so make sure your family will be protected from your debts by purchasing enough cover to repay them in full if you die within the term.
Do you want to provide an income for your family as well?
As well as repaying your debts, consider whether your family could afford to be without your income. If not, you can ensure your family is suitably provided for by providing an income by way of a lump-sum payment in the event of your death. Exactly how much cover you require will depend on your salary, the age of your dependents and whether or not you have other savings and/or investments. Seek independent financial advice from a FSA regulated expert for advice on calculating the exact amount of cover you should purchase.
Consider how much you can afford
Equally as important as how much cover your family will require is how much cover you can afford. While it may be very well to want to purchase the policy that will give your family the largest pay-out, that means paying higher premiums each month. There is no point over-insuring your family’s future at the expense of your current finances.
How long do you need to be covered?
The length of the life insurance term you opt for will depend on your age and the age of your dependents. You should aim to be covered until you retire, or until your children will have left home or entered full time employment. Life insurance is designed to substitute for your income, so consider how long your family will be reliant on that money and use that as a guide.
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