How to calculate the right amount of low cost term life insurance November 2, 2009
Posted by admin in : Buying Life Cover, Life Insurance Tips , trackbackToday’s post is going get down to numbers and clarify the amount and duration of life insurance required to cover your risk without buying too little or too much protection.
Buy too little and you’re still exposed to financial risk, buy too much and you could be wasting money at best or worse have to cancel the policy because you can’t afford it.
How much life cover do you need?
Well how much time do you have? There’s a short and a long answer to that question but as the answer is so important to your financial stability, we would encourage you to spend a few minutes taking a more detailed look at your finances to reveal your cover need number.
If you really don’t have time then a rough guide is to multiply your annual salary by six, and use this as a minimum cover amount. However, please remember that this is a very basic method that doesn’t take into account your personal circumstances and needs. Therefore you could be under-insured.
Again, we would recommend that you put the kettle on, sit down with your most recent bank statements and make a detailed assessment of your current financial position.
How to find your cover need number
Don’t be deterred by the name… ‘cover need number’. It’s quite easy to work out when you’ve got all your documents to hand. We’re going to take it step by step until we’ve got that magic figure. Here goes…
Step 1 – Cover Duration
First, you need to decide how long you need life insurance for as this can influence the total amount of cover you’ll need. If you’re needing a Whole of Life Insurance policy you can skip this step as you’ll be covered for life anyway.
Remember that life cover is to protect those who are financially dependent upon you from being disadvantaged by your death. As you’re reading this post, you’d no doubt answer Yes to the question “If I died today, would anyone be financially worse off?”. The question you need to answer now is “When do I expect to answer no to that question?”.
Will it be when you pay off your mortgage? When your children leave home? Or when you retire for example.
In short, how many years will it be before your current dependents are no longer financially dependent upon you? This figure should be considered as the duration of your term life insurance policy.
More than likely, your answers to these questions will be best guesses or estimates and there are a range of other factors you could consider. Unfortunately, only you and your dependents can way up all these factors and decide upon an accurate policy term figure.
Even so, the key question is simple… at what point can you reasonably say that no one other than yourself will rely upon your financial support?
This is serious stuff we’re dealing with here so it’s better to take your time and be safe rather than sorry. Remember though, if you are in any doubt, consult an independent financial or insurance adviser for unbiased guidance.
Write your chosen policy term here: years
Step 2 – Current Annual Living Expenses
From your bank statements and other documents work out a total figure for your current annual living expenses less any expenses that would cease on your death.
It might be easier to work out a monthly figure and just multiply it by twelve to get your annual figure. Don’t include any debt repayments on a mortgage, credit card or loans as we’ll deal with these next. Multiply this figure by your chosen policy term from step 1 above to give you your total living expenses.
Write your annual living expenses here: £
Write your total living expenses here: (annual expenses x policy term) £
Step 3 – Current Debts
Get your most recent mortgage, credit card, loan or finance statements and add up all the outstanding balances to give a total debt figure.
Write your total debts here: £
Step 4 – Future Financial Obligations
If you expect to have additional financial obligations in the future such as paying for a newborn child’s nursery care or eventual university education, add these together below.
Write your total future financial obligations here: £
Step 5 – Existing Cover
If you have any existing life insurance covering your mortgage for example, or cover provided by an employer, add it all together.
Write your total existing cover here:
Step 6 – Here comes the Maths bit…
First, add the figures together from steps 2, 3 and 4. Next deduct the existing cover figure from step 5. The figure you’re left with is your ‘cover need number’.
Write your Cover Need Number here: £
Please bear in mind that this cover need number is only a guide to the amount of life cover you should buy. If you are in any doubt about calculating this figure, please take advice from an independent financial or insurance adviser.
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- When should you review your UK life assurance policy?
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