Should I have life cover and if so what size should the cover be?
Chris Clare
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.
When you take out a loan on a property such as a mortgage the lender invariably wants you to insure the debt in the event that you die. So if you have a debt of say 120k for 25 years, the insurance that you would arrange based on the questions above would be term insurance for 25 years with a sum assured of 120k therefore ensuring that if you died, during the 25 year term of the debt, there would be a lump sum sufficient to repay the lender in full.
Moving onto protecting your family dependents, again in the question above they can be considered the individuals who would be deemed financially worse off in the event of your death. It should be said that you would also want them protected because you work to provide a certain lifestyle for them and you surely would want that lifestyle to continue even if you were not around to maintain it.
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.
If you do need to arrange a lump sum insurance plan you will need to know how big a lump sum is necessary. Whilst there are a lot of calculators on the internet designed to give you an idea of how much you would need in order to generate an income of a set amount, they do rely on assumptions of investment growth and inflation. However it is not considered unacceptable to taker out a lump sum for about a multiple of ten of what is required as an income. So in this example you would need a lump sum life insurance plan for 200,000k. This theoretically in turn could be invested to possible generate the 20k per annum into the future as income.
So in summary, the need for life insurance is defined by the answer yes someone will be worse off in the event of my death and the amount necessary is defined by establishing the amount either needed to repay liabilities or the amount lost in the event of the death.
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