How much life insurance is the right amount for my family?

Buying life insurance is an important decision, it takes time, thought, and you need to know where to start, right? With all the options to think about, it’s tempting to bury your head in the sand and forget about it, but that won’t help anyone if your ticker times out. We’ve put together this short guide to help you make an informed decision quickly, and confidently.

This article assumes you know what life insurance is. If that’s not the case, please read this introductory article.

Before we start, please note we are not a financial advisor, and we cannot give you financial advice. If you need advice, we recommend you seek out a trusted financial advisor.

 

What types of insurance are out there?

You found this article which shows you’re on the right track for figuring out the benefits of life insurance. That’s a great first step, well done! Now you’re here… let’s start with a bit of jargon busting.

Over the next page or so we’re going to explain some of the different types of policies out there, so you can work out what might be best for you. Life insurance isn’t just about death… think about it as being able to protect your loved ones for their life after (your) death. It’s actually about you being a hero just in case the worst happens. Taking care of those you love.

 

Level and decreasing term

A level term policy is a policy with a fixed amount of life insurance cover (this is called the sum assured) which is paid out if you die during term of the policy.

Alternatively, a decreasing term policy is one where the sum assured decreases over time. These are often used to protect repayment of a mortgage debt, for example. Decreasing term will nearly always be cheaper than a level term policy taken for the same amount of cover, and if you use it to cover a repayment mortgage, it will just cover more or less what is needed without having you pay more than necessary.

Figure 1 shows an example of how level term and decreasing term policies might vary over time for a £100,000 policy with a 25 year term. In this example, if a claim is made after 20 years, the payment provided under a decreasing term policy will be £40,000, whereas a level term policy would pay £100,000. The figures provided are for illustrative purposes only.

Level term life cover vs Decreasing term life cover comparison
Figure 1. Illustration of decreasing and level term life insurance cover over time

 

What’s best for me?

There are various schools of thought regarding how to calculate how much life insurance you may need. For example, some simply suggest 10 times your annual salary as a guide for your cover (as MoneySavingsExpert.com notes in this article), while others provide more complex means of calculating your needs. What’s important is to think about what you would need to leave behind if you were unable to provide for your family and to consider how affordable that cover is to you.

 

Can I have both level and decreasing term policies?

Yes, because they meet different needs. Level term could be used to protect your family’s finances by replacing lost income and covering living expenses, and decreasing term could be used to cover debt or a financial need that decreases over time (such as a mortgage or providing for your child’s education). It may be easier to organise your life insurance policies to take advantage of both types.

 

What costs do people usually take cover for?

Most people will take out life insurance to cover their outstanding mortgage debt. However, according to research by finder.com only 50% of people with a mortgage have life insurance. When you have financial dependants and a mortgage, your dependants might have difficulty repaying the mortgage should your income suddenly disappear, which could lead to your home being re-possessed by your mortgage lender and your family having to find somewhere else to live.

Apart from a mortgage, there are other types of expenses to think about. It can help to take care of debts such as credit cards, car loans, holiday loans, anything you are repaying on finance, or any other regular financial commitments you have. These ‘smaller’ costs are easily overlooked but could become a burden should your loved ones inherit them.  

The cost of your funeral and related expenses is another cost to consider. Your family will be under a lot of emotional stress, so taking away the additional stress of how to pay for it all might provide a slight sigh of relief. To get a better idea of potential costs, check out this article on moneyadviceservice.org.uk

Then, there are the basic “life after death” living costs for your loved ones to think about. These help to ensure their living, education and maintenance needs, are covered. Consider base needs such as food, clothing, rent, bills and council tax, but do also bear in mind travel expenses and holidays. Most of these would have been covered by your income prior to “death” but now that is gone. How will these things be provided for? You will need to decide what lump sum to consider covering for all of these needs.

Children’s education and upbringing is another important category to consider. Until children reach a certain age, they are likely to need financial support for educational costs and related expenses. This might include supporting them through university if that is your intention.

In addition to thinking about the one-off or yearly value of these costs, you should also consider how long you need this cover to last for. This is your call; for example, many run it to retirement age or when the children are likely to leave home or when the mortgage is likely to be paid off.

 

Categorising the expense types

We’ve listed below categories for the types of expenses that you may want cover for.

Table 1. Expense types

Expense type

Level cost types

Decreasing cost types

Debt and one-off financial commitments

 

Interest only mortgage

Loans and finance agreements

Credit cards

Other debts

Funeral

Repayment mortgage

 

Life after death costs

Basics

(rent/bills/council tax/insurance)

Lifestyle

(holidays/days out)

Family

(number of children etc.)

Children’s education

(e.g. school, university)

 

Doing your own maths

The tables below can help you work out what sort of cover you need and to make an informed choice. Hopefully, this will put you in a better position to calculate how much cover would be required to enable your loved ones to maintain the same quality of life without financial pressures if a claim needs to be made.

 

Adding up your level costs

Use Table 2 to jot down your own figures.

Table 2. Your level costs

Expense type

Yearly Cost
(£)

Time period
(years)

Total Cost
(£)

Debt (interest only mortgage, credit cards, loans)

 

N/A

 

Funeral costs (assuming you have no funeral plan)

 

N/A

 

Basics* (rent, bills, council tax, insurance, etc.)

 

 

 

Lifestyle* (holidays, treats, days out, etc.)

 

 

 

Total

 

 

 

* these should be multiplied by the number of years you plan to support these costs for

Add up your numbers and multiply by the number of years required. If you’re not sure on the number of years, use the largest number of years that your dependants will be dependant for.

Calculation example: if the basics cost £10,000 per year and you want to cover your dependants for 10 years after you die, the total amount for the basics would be £100,000.

 

Adding up your decreasing costs

Use this table to jot down your own figures.

Financial commitments typically include your mortgage, however if you have other liabilities that decrease over time, it’s a good idea to include them as well. You’ll also want to compare whether a level term policy might make more sense financially overall if you can get a good deal on it.

Table 3. Your decreasing costs

Expense type

Amount Owed
(£)

Time period
(years)

Repayment mortgage

 

 

Other liabilities that decrease over time (e.g. education and school fees)

 

 

Total

 

 

 

Final thoughts

With the numbers you’ve calculated you should be in a better position to judge how to best protect your loved ones using term life insurance.

Bear in mind your calculations are working with your costs as they stand now. You may also want to consider how inflation may affect your figures.

And of course, do keep in mind as life circumstances change (such as having children/more children), you might want to revisit the calculation to factor the change in.

 

Next steps?

If that all makes sense to you, great! Check out revitilife.com/quote and get your quote when you feel ready. You will have the option to purchase the policy and be covered immediately – one important item ticked off your list!

If you have any feedback regarding this guide, please let us know so we can improve it.