Life Insurance – How Much Do You Really Need?

As an air of uncertainty continues to cloud the UK economy, we could be forgiven for throwing caution to the wind and choosing to live life to the full, regardless of the consequences. Millennials, in particular, are renowned for living life one day at a time. You only live once, right?

Yes, you do. But what if the worst were to happen and you could no longer support yourself or your loved ones?

According to Business Wire, the millennial generation is now the least prepared for unexpected life events due to a lack of adequate life insurance cover. This is compounded by research from Aviva, which revealed that half of families with children aged up to four do not have any life insurance, which could potentially leave dependents struggling to make ends meet should one, or both, of the main income earners fall ill or pass away.

In addition, the Association of British Insurers reported that, in 2017, protection insurers paid out a record-breaking £5bn in claims in income protection, critical illness cover and life insurance, leading to consumers receiving some £13.9m a day in pay-outs, proving that, as a nation, we are claiming on our life insurance policies.

When we are young and healthy, paying for life insurance can feel like an unnecessary expense – especially when finances are already stretched on housing costs, saving for a pension, starting a family or paying off debt. The irony is that taking out life insurance when we are young, fit and healthy is the best time to do it, as you can get insurance more easily and cheaply. Leave it until your health declines and you may find yourself uninsurable, at least not at a price you can afford.

Figures suggest that people typically overestimate the cost of life insurance by about 5 to 10 times, putting them off taking out cover. However, it can be more affordable than you think, particularly if you start early.

Below we detail some of the most common forms of life insurance.

TYPES OF LIFE INSURANCE

While there are many forms of life insurance, they broadly fall into one of two categories – term or permanent.

Term Insurance
As the name suggests, term only covers you for an agreed period of time and is therefore usually cheaper. Terms can range from 1 to 30 years, but the most common is 20 years. People generally choose this option if they wish to cover themselves up to a certain point in their lives, for example, when their children graduate from university and leave home. The downside to term insurance is that if, for some reason, you do wish to renew the policy once it expires, it will be more expensive to do so, as taking out a policy when you are 50 will cost more than when you were 30.

Permanent Insurance
By contrast, permanent insurance cover will protect you for life, as long as you make regular premium payments. It is more expensive that term insurance and has an investment component. Most people will not require this type of cover as their financial obligations will generally decrease as they get older. However, people with long term care requirements, or a child with special needs for example, may find this type of policy suitable.

The most common form of permanent life insurance is whole life insurance – this offers a savings account (which grows in line with the dividends the company pays to you) in addition to a death benefit. Variable life insurance is similar to whole life, except that is carries more risk, as the monies held in the savings account can be invested in stocks, bonds and mutual funds.

HOW MUCH INSURANCE DO I NEED?

The answer to this question will inevitably depend on individual circumstances, however there are some general ‘Rules of Thumb’ you can follow to help you work this out.

The 10-Times Rule
The classic rule is that we should have 10 times our income in insurance benefits. The reality is that this can vary anything between 5 to 15 times a person’s salary, depending on what their debt is and any other planned expenses they may have.

The DIME Rule
This stands for Debt, Income, Mortgage and (your children’s) Education expenses. By adding these together, you can calculate how much life insurance you should have.

The LIMRA Model
LIMRA, a worldwide research, consulting and professional development organisation for the financial services industry, have created their own model. This model suggests that, if you have a spouse or child, you should have enough insurance to replace 75% of your income for the next seven years, which equates to about 5.25 years’ worth of annual income over the seven-year period.

As with any type of insurance, there is no one size fits all solution. At Finura, we can audit your current personal and work insurance and provide solutions to ensure that you and your family are comprehensively protected in the most tax efficient and cost-effective way available. Where possible, Finura only uses insurance services that have been awarded a 5-star Defaqto rating.

If you would like to talk to an adviser about your insurance policies, please contact Finura.

Articles on this website are offered only for general information and educational purposes. They are not offered as, and do not constitute, financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional.

Past performance is not a guide to future performance and may not be repeated. Capital is at risk; investments and the income from them can fall as well as rise and investors may not get back the amounts originally invested.

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Sources: https://www.businesswire.com/news/home/20181113005148/en/New-Study-Millennials-“at-Risk”-Generation-Life
https://www.forbes.com/advisor/kstoller/2019/08/06/how-much-life-insurance-do-you-really-need/
https://www.thetimes.co.uk/article/life-cover-that-can-cost-less-than-lunch-b5dzzckw2

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