When you take out a policy, knowing exactly how much life insurance you need can be difficult. At the very least, you’ll want to ensure your dependents can pay off any outstanding debts, meet their day-to-day needs and maintain their current lifestyle if you’re no longer around.

What is life insurance?

Life insurance pays the named beneficiary of the policy a lump sum following the insured person’s death. You can name anyone as your beneficiary, but if you’re married or cohabiting with someone, it’s typical for the policy beneficiary to be your other half.

The most common type of life insurance is a Term Life Insurance policy, so called because it lasts for a fixed period of time. It is usually bought by people when they take on a mortgage, to ensure the outstanding debt would be paid off if they died during the mortgage term.

But there’s also Whole of Life Insurance, which is paid out no matter when you die (provided you keep paying premiums). It’s designed to cover funeral costs and any inheritance tax (IHT) liability that your beneficiaries may otherwise have to pay.

To find out more about the different types of life insurance, read: What to ask when taking out a life insurance policy

Financial experts recommend you aim for 10 to 15 times your annual salary

Who needs life insurance?

You may not need life insurance if you’re single, have no dependents, and have enough money to pay off any debts and cover your funeral costs.

But if you’re married, in a civil partnership or co-habiting, have children or other dependents such as elderly parents, and have debts, such as a mortgage, car loan or credit card, you probably do. A life insurance policy will ensure your loved ones have the money they need to cover their costs if something happened to you.

What should life insurance cover?

How much cover you’ll need depends on how much your dependents will need, and you should seek professional financial advice to help you get this right.

As a rough indication, some financial experts recommend you aim for 10 to 15 times your annual salary. So if your salary is £50,000 per annum, that calculation means you’d need a minimum of £500,000 worth of cover. However, there are other additional elements at play that you need to consider.

– Existing debt. You need to ensure your family can settle any outstanding debts, including the cost of your funeral, mortgages, car loans, credit cards and personal loans. Make sure you take into account any extra interest and early repayment charges as well.

– Income replacement. If you’re the sole breadwinner, your income will need to be replaced. If you have children, and both parents are working, the remaining parent will need to take on all childcare duties. That means they may need to reduce their hours or even stop working altogether, so you’ll to consider replacing their income as well as yours. Don’t forget the effects of inflation too, which could seriously impact your family’s income over the long term.

– Income in retirement. If you are the primary breadwinner in your family, your partner will likely rely on your pension provision when you both retire. If you’re no longer around, you’ll want to ensure they have access to an income that allows them to maintain their lifestyle and achieve their retirement goals. This means the lump sum from your life insurance should be enough to cover their pension contributions until retirement, or otherwise support their retirement funding needs.

How much life insurance do I need?

Once you’ve calculated the amount you’ll need to cover your debts, income and future pension requirements, you need to think about the additional ‘big’ costs your family may incur.

For instance, childcare costs, private education and university fees, and the need to support ageing parents, must be considered. You won’t be able to account for every eventuality, but take time to think about the years ahead.

At the same time, you need to consider the cost. More cover means a higher premium, while your age, the type of cover you choose, your current health and existing medical conditions will all influence the cost of your policy.

An independent financial planner will search for the most appropriate product from the entire market

Whole of Life Insurance

Unlike a Term Life Insurance policy, which is designed to provide your dependents with an income if you die before you retire, a Whole of Life insurance policy is usually taken out when you’re older. It pays out a lump sum upon the insured’s death to cover funeral expenses and IHT liabilities on your estate.

In this instance, it’s essential to seek professional advice from a financial planner. They will be able to calculate the IHT that might be due on your estate, and design a IHT strategy that will help minimise the potential tax bill.

Choosing a life insurance provider

There are many providers offering different levels of cover, each with their own restrictions and pricing.

An Amber River financial planner will calculate how much cover you need based on your individual circumstances, search for the most appropriate product from the entire market, and recommend the best policy for your specific needs and budget. What’s more, they’ll be able to make sure it fits perfectly with your financial plan, so you can be sure everything is taken care of – no matter what happens.

Get in touch

To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.