How much should I insure my life for?

Question

One of the major impacts will be on your mortgage. If you and your spouse hold the property as joint tenants, the survivor will automatically get it, mortgage n’all. If you are the main breadwinner, you will also need to ensure that you can replace your salary.

Holly Mackay · Accepted Answer

Deciding what you are worth may feel a little weird, but it is an important calculation when buying life insurance. It determines how much your family should get if you die, which in turn, will affect how much life insurance you need to buy.

There are some key things to think about: One of the major impacts will be on your mortgage. If you and your spouse hold the property as joint tenants, the survivor will automatically get it, mortgage n’all. One of the main uses for a life insurance policy is to ensure some or all of this is paid off it you die. If you are the main breadwinner, you will also need to ensure that you can replace your salary. While you may have some death-in-service benefit from your company, it may only be two or three times your salary, which may not be enough to support your family long-term.

Even if you are not the main breadwinner, do not underestimate the cost of providing childcare. If you are a stay-at-home carer, your spouse would need to use childcare if they planned to continue working full time.

Finally check your contract at work as it may well have some basic life cover in place for you already.

In practice, many online life insurance comparison sites have calculators to help you determine how much you are likely to need. They should also help you decided which type of life insurance is right for you. These are:

LEVEL TERM INSURANCE pays out a fixed lump sum if you die during the policy term. This lump sum doesn’t change over time, so you know exactly what any dependents will be left with in the event that you die. So, you take out £100 grand of life cover for 20 years and – yup – your family gets £100,000 if you die within this timeframe. Nice and simple. Well, maybe just simple.

INCREASING TERM INSURANCE Many people want to take out life insurance, which will factor in the rising cost of living, and therefore opt for increasing term insurance. The sum insured either increases by a fixed amount each year, or rises in line with the Retail Prices Index (RPI) measure of inflation. So you’ll pay a little bit more every year BUT if you meet your maker after 10 years, not 5 years (for example) your family’s payout will be a bit bigger.

DECREASING TERM INSURANCE If you are looking for life insurance to cover a debt that will gradually reduce over time, such as a repayment mortgage, then decreasing term insurance is worth considering. With this kind of cover, any pay-out also reduces over time, which means the premiums are lower than for level term insurance.

JOINT LIFE INSURANCE If you are married or have joint financial commitments with a partner or relative, you may want to consider a joint life policy rather than two single policies. However, although this will mean premiums may be cheaper than if you have two separate plans, remember that joint life insurance is normally written on a “first death” basis.