Anyone with financial dependents should take out enough life insurance cover to ensure their family can maintain a reasonable standard of living should the income earner(s) die.
Strictly speaking, people who do not have financial dependants do not need life cover. However, by taking out enough life insurance to cover your loans and to pay for a funeral, you will minimise the financial and administrative impact on family members dealing with your estate.
How much cover do I need?
You should take out enough cover to help with your family’s future needs, including things like paying for your children’s accommodation (they can borrow tuition fees and living expenses from the government) if you think they might go to university.
The following is a rough guide to calculating the amount of life cover you need:
For a spouse or partner that is financially dependent on you – 48x your monthly after-tax income
For each child that is financially dependent on you – between 12x and 36x your monthly after-tax income, the higher multiple applying if your children are young (say under 4 years old) and the lower multiple applying if your children are older (say 15 plus). Adjust the multiple for children between these ages.
The full amount of any outstanding loans.
The cost of university accommodation if you are confident your children are likely to go into higher education. The average UK cost of university accommodation is about £8,000 a year over three or four years. Therefore, somewhere between £25,000 and £30,000 is about right for children who might attend university in the next few years.
Many employers provide a basic level of life insurance cover, usually as part of their pension scheme. It is usually calculated as a multiple of basic salary such as two times or four times salary. If your employer already provides some life cover, you can deduct this from the amount of cover you have calculated.
Emma and her partner, Jack, have two children: Amy (6) and Ben (3). They own their own home with a mortgage of £100,000 and have two car loans totalling £15,000. Although Emma and Jack’s children are young, they hope that they will follow in their parent’s footsteps and go to university.
Emma’s monthly after-tax income is £2,300 and Jack’s monthly after-tax income is £2,000.
Emma’s employer provides life cover of four times her gross salary of £31,500, or £126,000 of life cover. Jack’s employer provides life cover of two times his gross salary of £27,000, or £54,000 of life cover.
Life cover for Emma
Emma should consider taking out life cover of:
48 times net monthly income or £110,000 for Jack’s benefit
Around 65 times net monthly income or £150,000 for her children’s benefit
£50,000 to cover her children’s future education costs
£100,000 to cover the mortgage
£15,000 to cover the car loans
Less £126,000 of cover provided by her employer
In total, Emma should take out cover of around £300,000
Life cover for Jack
Using a similar calculation Jack should consider cover of around £335,000
Rather than carry out a manual calculation you could instead use an online calculator such as this one https://www.aviva.co.uk/life/life-insurance/life-insurance-calculator/
Making sound financial plans is important and the decisions you make can be life changing. If you need support, you may wish to speak to a financial adviser. If you do not have one, you can find one near you at www.unbiased.co.uk. Whatever advice service you choose, there will be a charge. The amount and payment terms will be explained to you by your adviser.
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