How much life insurance do I need?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Life insurance can be a crucial “pillar” within a wider strategy for your household’s financial protection. If the worst happens, your loved ones have a means of financial support to help them through their grief. Yet how much life insurance do you need?
Determining the appropriate sum is not always easy, especially since your circumstances and goals can change throughout life. Therefore, you need to continually review your policy as time goes by. Below, our Grantham financial planners offer some guidelines to help readers discern the suitability of different life insurance policies under their consideration.
We hope these insights are helpful. To discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Check your wider benefits first
Life insurance is not always needed. If you are young and single, for instance, then you might not have dependents (e.g. children) and a large outstanding mortgage which you would leave behind if you died prematurely. However, a family with two infant children will likely want to consider life insurance as a matter of greater priority.
Before rushing to buy a policy, however, check your employment benefits. Some organisations offer a “death in service” benefit which operates similarly to a life insurance policy. Here, your loved ones could receive a multiple of your salary as a lump sum (e.g. 4x your earnings) if you die whilst employed at the organisation.
This can reduce the need to take out your own life insurance policy; or, it can lower the lump sum required from your own policy.
Check your liabilities
One of the main benefits of taking out life insurance is that it can help to settle any outstanding mortgage liability if you die before it is fully repaid. However, only 58% of homeowners have life cover despite this protection that it can offer.
It is vital that your family is not left in a vulnerable financial position due to debts or liabilities that you have built up. Please take note, if your spouse (or another loved one) had a joint loan agreement with you, or if they provided a loan guarantee, then they may be responsible for the deceased person’s debts.
Apart from these situations, surviving loved ones are not automatically responsible for a deceased person’s unsettled debts. However, this does not mean that the former cannot be affected by a lack of life cover. For instance, if a deceased person dies whilst holding a lot of unpaid credit card debt, this will likely be taken out of the value of their estate – leaving less inheritance to beneficiaries. If any liabilities cannot be afforded using liquid assets (e.g. cash savings), then loved ones could be forced to sell the family home to cover them.
Look at the long term
The aforementioned highlights another area of financial planning where life insurance can sometimes play an important role – inheritance tax (IHT) planning. In 2023-24, IHT is typically levied at 40% on the value of an estate once it exceeds £325,000. This tax-free allowance can be “extended” by up to another £175,000 (assuming the main residence is worth less than this) if the family home is left to direct descendants, such as children. However, many individuals will own estates which cross over these thresholds and will inevitably require an IHT bill to be paid in the future.
Here, life insurance can help (depending on the individual’s circumstances and asset base). When the estate owner dies, the lump sum paid out by the policy can cover the IHT bill – in part, or even entirely. To determine if this is a good idea, it helps to sit down with a financial adviser to compare the plausible total value of your monthly premiums with the likely future IHT bill you will face. If the former is lower, then taking out life cover could be worthwhile. Just make sure that it is written into an appropriate trust structure, or the lump sum itself could be counted as part of your estate for IHT purposes!
What next?
With these considerations in mind, how much life insurance do you need? In short, it depends on your circumstances and goals. Yet a good starting point is to assume you will require 10x your annual earnings. For instance, an individual earning a £30,000 salary could need life cover which would pay out a £300,000 lump sum if they die during the policy term.
You may need less cover than this, more or none at all. Speak with a financial adviser to fully explore your options with the best available information. Assuming you do need cover, it pays to shop around and compare different policies. Again, an adviser can help you – possibly unearthing options which may not be readily accessible to you when searching alone. Once your cover is in place, make sure that you review your policy as the years go by to ensure it still meets your needs – especially if your circumstances change (e.g. if you go through a divorce).
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
