Should I have life cover and if so what size should the cover be?
As a financial advisor I find that I am often asked that very question but it has to be said that it is generally quite easy to answer.
In order to establish if someone needs life insurance you first need to ask yourself a very simple question. In the event I die will anyone be financially worse off?
The term “someone” means anyone who may be financially connected to you such as your mortgage company, a dependent relative such as a child or spouse or in some cases a business partner. In short it just means in the event of death if someone connected to you is impacted financially then you need life insurance.
So bearing in mind the various needs such as family protection, mortgage protection or even business protection we will first look at the most used of all types of insurance, and that is insurance to protect a loan on a property.
Let’s say for example you have a mortgage for a 100k in the event that you die there will be a need for a 100k to repay the lender. This is simple all you need to arrange is life insurance cover for 100k and in the event of your death it will pay out that amount of money and then however is dealing with your estate will be able to settle the debt, simple.
Now family protection, this is probably the second most common type of protection but in my opinion by far the most important. Why? Well, because it is for the benefit of your love ones. What is the point of working to build up a lifestyle for you and your loved ones, for them to only lose it in the event that you were to die?
Family protection is a little harder to quantify in so much as how much do you take out in life insurance? Let’s say that you are the breadwinner in a household and your income is 20k per annum. If you can get hold of a type of insurance that pays out an annual sum such as the type we have in the United Kingdom called family income benefit then all you need to do is take that out for 20k pa and that is sorted. If this is not the case then you will need to take out a lump sum type insurance policy generally known as lump sum term assurance.
How much money would you need from a lump sum plan in order to produce a lump sum of 20k per annum? This is very subjective and does depend on market conditions. It is also effected by were exactly you intend to invest the money in order to produce the returns. That said it would not be considered unusual to times the need by ten and use that figure for the ultimate value ie 20k per annum times ten transfers into a 200k lump sum. Invested this would hopefully be able to produced the desired 20k well into the future.
To bring all this together you only need life insurance if someone is financially worse off in the event of your death and the amount needed for that life insurance is the amount of financial impact created as a result of that death.
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