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Life insurance coverage
Life Insurance Coverage:
How much is enough?

If you are looking to take out life insurance coverage, then one of the hardest decisions you'll have to make is how much life insurance is enough. After all, you do want your family to have enough financial security to be able to cope if you do happen to die early. But, you don't want to take out too much life insurance coverage as this simply means that you'll be paying over the odds in premium payments whilst you are still alive. So, how much life insurance is enough?

Work out your life insurance cover levels

The first thing you need to consider here is that no two people will have the same needs when it comes to choosing the right level of coverage. What you need will depend on your own family and financial circumstances. And, the cover you need may increase or decrease over time.

So, for example, a married man with no children whose wife works full-time will have very different life insurance needs than a married man with two young children whose wife has given up work to look after the family. In the first case, for example, the man may opt to simply take out a policy to cover the repayment of the mortgage to take the pressure off his wife if he dies. In the second case, however, the man will have to consider covering his wife's expenses until the children have grown up.
The main things to consider with life insurance coverage and figuring out how much life insurance is enough include:

  • Mortgages: When determining how much life insurance is enough, consider how the mortgage will be paid if you die.

  • Dependants: Do you have any dependants who rely on your income? How old are they and how long would they need financial help if you were to die? This could be the number of years before a spouse can return to work after looking after a young family or until children have finished their education and become financially independent.

  • Outgoings: How much does it cost to run your household on a monthly basis?

  • Other expenses: When considering life insurance coverage, do you have any other types of borrowings that will need to be paid off? These could include loans and credit cards, for example.

  • Work cover: Does your employment contract give your family any financial benefits if you die 'in service'? This may take the form of life insurance coverage or some other form of benefit.

  • Pension: If you have a pension, will it give your family any financial benefits if you die?

  • Inflation costs: When assessing how much life insurance is enough you also need to factor in rises in inflation to make sure that the cover your family gets is not devalued as years go by.                

When you are working out how much life insurance is enough you will need to aim for life insurance coverage that eases financial pressures for necessary periods of time after your death.

Many people find that the easiest way to assess how much life insurance is enough is to firstly work out:

  • How much money from life insurance coverage would be needed immediately to repay the mortgage and other borrowings;

  • Add on how many years of financial help would be needed (and how much each year would cost);

  • Then take away any other payments that might be made such as pension or work package payments;

Finally, take the resulting sum of money (remembering to add inflationary increases) and you should get the answer to how much life insurance is enough and the life insurance coverage you and your family need.

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