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Life Insurance: How much cover is required?

January 20, 2017

Whilst life insurance provides financial security for your loved ones, it’s not always very easy to work out the amount of cover you will require.

At the very least, you should ensure that debts such as mortgages and loans are covered. But the financial obligation is often not limited to outstanding debts as you should also account for additional costs such as child care, higher education, council tax bills, utility bills and other day-to- day costs too. But having a high amount of cover also means higher premiums, which is why you should look at the affordability and adjust accordingly.

Mortgage Protection cover

In most people lives, the biggest purchase is their home and the biggest debt is the mortgage. So if the mortgage is reliant on your earnings then it is important to think about how your family would be able to pay the repayments it if you pass away.

In such instances, it makes sense to get life cover which tracks your mortgage repayment plan, such that it lasts as long as your mortgage and decreases in line with the outstanding debt. To add, if your mortgage is interest only, then the interest and capital repayment have to be taken into account.

In addition to your mortgage, you may also have other debts/costs which should be included the calculation so that level cover is appropriate.

Life cover for the family

Financial experts suggest a minimum cover of x10 your annual salary, but you may want to consider even x20 salary if you have major outgoings or a large family to support. Moreover, your employer may offer a death-in-service benefit which is typically x4 the basic salary, however this is much lower then what you may need and hence can be topped up with a life insurance policy. What’s more, the death-in- service policy is employee specific, so if you change jobs the benefit might not be offered by the new employer, leaving you without cover.

Moving on, even if you are not employed, life insurance can still be a viable option. For Example, if you are a stay at home-parent, then you are probably not contributing financially to the household but without you the earning partner would need to pay for childcare costs, which can be sizeable to say the least.

Optional Add-ons

In addition to your life insurance cover, you can include critical illness cover, which makes the pay-out once you are diagnosed with a specified critical illness.

With regards to the type of illness covered, the list can be very long especially as some insurer’s cover more than 60 different injuries. However it is important to note, that in many cases, the illness needs to be critical or permanent before the pay-out will be triggered. For the case of cancer, treatable cancers will not be on the list or it will need to be at a certain stage before the pay-out will be considered. Ultimately, it is of paramount importance to read the small print and understand the exclusions and inclusions of your policy.

Regular review

In many instances, your financial obligation will change during the term of the policy so it is important to review whenever you have a major life occurrence, such as another property purchase, a new addition to the family or even a divorce. By doing a review, you can be sure that you have the right cover to protect your family from financial hardship.

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