How much life insurance do I need?

Different types of life cover

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Life insurance can provide peace of mind that your loved ones will be financially secure if you’re no longer around to provide for them, but working out how much cover you need isn’t always easy.

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Coronavirus has driven home the importance of financial protection, with life insurance providers reporting a surge in interest in this type of cover. Mark Hussein, chief executive of HSBC Life UK, which has recorded a 30% increase in visits to its life insurance web pages, said: “The cover that protection offers customers is increasingly seen as invaluable, with people recognising that looking after themselves and those they love is a vital investment. Recent events have only served to underline this thinking.”

Do your sums
Many people buy life insurance at the same time they take out a mortgage, to ensure that this debt will be paid off if they’re no longer around to make monthly payments. Cover usually finishes at the same time as the mortgage and decreases as the amount owed on the mortgage reduces.

Whilst having life cover for your mortgage means that your dependants won’t have to worry about the roof over their heads should the worst happen, it’s worth thinking about how they might cover other outgoings if you’re no longer around.

For example, think about how much you spend on things like education and childcare costs, utility bills, Council Tax, food and other outgoings each year, as well as how long your dependants are likely to need financial support. This should enable you to work out the rough lump sum you’d need to protect your family. Some experts suggest having life cover equivalent to 10 years’ your salary, but if, for example, you have young children, you might want to increase this to 15 times’ your annual income.

Before buying cover, check whether your employer offers ‘death-in-service’ benefits. These mean that if you die while you are employed, they will pay out a lump sum to your dependants, often up to four or five times your salary. This reduces the amount of life cover you need to take out.

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Different types of life cover
The two main types of life cover are term assurance and whole-of-life insurance cover. Term assurance pays out a lump sum if you die within a set period of time, whereas whole-of-life cover offers protection for your lifetime, so premiums for this type of cover tend to be much more expensive than for term assurance. Term assurance is therefore usually much more popular than whole of life cover, as it is more affordable.

If you’re keen to keep costs to a minimum and are married or have shared financial commitments with someone else, you might be considering taking out a joint life policy rather than two single policies. However, although this will be more cost-effective initially than having two separate plans, you need to bear in mind that cover will end when one of you dies. The remaining partner will then have to take out a new policy if they want cover to continue and if they are much older at this point, premiums are likely to be more expensive than when the original policy was taken out as insurers will consider them higher risk.

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