Having children is a huge change in your home and circumstances. You suddenly have one or more lives dependent totally on you. If you aren’t here anymore you may have a spouse/partner/family to look after them you child/children. But how do you financially look after them till they themselves are a grown up? The easy answer is Life Cover. For a relatively small premium it will provide a lump sum to a loved one should you die. Unless you have some magic powers you never know when that will happen hopefully many many years from now.
BUT it just might not be!! So the big question is How much life insurance do I need? While nobody likes to think of their own demise, it’s prudent to consider what financial ramifications your death could have on those you leave behind.
It gives me peace of mind to know that if I die, my wife will have enough to pay off all our debts and take care of our family. While it’s hard to dispute the sensibility of life insurance in general, many people disagree on how large of a life insurance policy you should have. So, here are some things to consider when you ask how much life insurance you should buy.
- Rules of Thumb
When it comes to buying life insurance, there are some basic guidelines to help you determine how much you need. While no rule of thumb should be followed blindly, they can represent a good starting point for further analysis. Here are several widely-used rules of thumb when it comes to buying life insurance:
- Your salary: To calculate your suggested policy amount, simply take your monthly/annual salary less your mortgage payments or loans that would be paid off in the event of your death and multiply to by your youngest child to age 21. This approach is pretty easy: if you make €75,000 a year, after tax and mortgage payments you are left with €50,000 per year. So say it takes that much to run your household every year. (We know there are other things to take into account but we are trying to keep it simple). If you are married your widow will receive a state benefit of €10,000 per year approx. but we aren’t including this in our calculations. Your youngest child is age 4. So €50,000 (how much is costs to run your household) x 17 (years to your child is 21=€850,000 Life Insurance lump sum.
With this amount of cover, your beneficiary should be able to replace your income with interest and dividends earned from investing the life insurance proceeds.
For a 30 year old non smoker cost of above would be €31.42 per month. Not bad ehh?
- Sliding Scale: Some suggest refining the multiplier above, based on your age. As your children get older your need for Life Cover is decreasing. Some suggest taking a large Mortgage Protection type Life Cover (decreasing) and having it decrease over the term. This way it provides a very large lump sum the younger your children are.
For a 30 year old non smoker € 1.5 million Life Cover over 17 years = €30.46 per month. This type policy will decrease to €0 over 17 years.
- 5 to 10 times salary: If you are not looking to replace your salary for life, many suggest just getting 5 to 10 times your current salary in insurance. The idea with this rule of thumb is to help your loved ones pay off debt and to have some time to grieve without the added stress of financial worry. However, it won’t replace anywhere near your full income needed depending on your child’s age.
- Income on Death: If you are uncomfortable with the multiplier idea or by leaving a large lump sum the monthly income on death may be a better option. With this option upon your death the insurance company will pay a monthly benefit to your dependants for the reminder of the policy term.
Zurich Life & New Ireland, for example, offers the option of a guaranteed monthly income from the time you die until the end of the policy term. This means that if you get a policy for 30 years, but die in the 10th year, your dependants would receive a monthly income for the remaining 20 years of the plan.
People joke that you want to have enough cover to make your spouse comfortable, but not enough to make them too comfortable with the idea of living without you. There might be something to that.
- What Can You Afford?
Regardless of how much cover you need, think you need, or someone says you need, a critical financial consideration is how much life insurance you can afford. Exceeding a balanced budget isn’t in keeping with sound financial planning, no matter what it is. Admittedly, adjusting your spending in other areas to increase the premium you can afford may be prudent.
Besides budget considerations, it’s important to consider that missing payments can result in the termination of your policy. Then, you deal with having no life insurance at all, and possibly having to take out a new policy with a higher premium when you’re older. It’s better to opt for a smaller, more affordable policy than to risk losing cover altogether when you fall on hard times.
Bottom line: don’t ask your family to live like paupers now so that, in the eventuality of your death, they can live like kings.
Make this your first order of business. This will help you to explore your maximum cover without being stressed or tempted to buy more than you can afford. Find your maximum monthly payment, and stick to it as you seek quotes.
- What Is Your Minimum Cover?
None of us would mind making our family comfortable for the rest of their days. But before we do anything, let’s consider the bare minimums needed. Typically, the most important factor people consider is liabilities.
Is there a car payment? A home mortgage? A serious desire to provide for your child’s college education? Evaluate what debts and costs your family will have to face without you. Also consider funeral and possible end-of-life expenses.
Add up these costs, and you’ll get the minimum cover you need. (Can’t afford the premiums even on that smaller amount? Get as close as you can, and increase your cover as soon as you’re able.)
- What Do You Want to Accomplish?
The bulk of your baseline cover should be dictated by the minimum cover requirements you just tallied. However, there are those who do want a considerable amount more than what will meet their family’s financial obligations.
Many people evaluate what it would take to enable their grieving spouse to mourn for a year or two before returning to work. Others want to replace their income for life, so that a spouse never has to return to work. This consideration may be even more important if your spouse is a stay-at-home parent, and you don’t want that situation to change of necessity.
Again, this depends almost completely on your individual lifestyle. So, give thought to what you’ll want the money to cover, over and above paying off your debt.
- What About Non-Working Spouses?
Many of the calculations we’ve covered assume that you’re currently bringing in an income. But what if you’re a non-working spouse? Do you still need life insurance?
It depends. If you don’t have children at home, you may not need life insurance on yourself other than funeral expenses. Your spouse’s expenses may not increase significantly if you were to pass away.
But if you’re a stay-at-home parent, you’re providing significant services for the greater good of the family… for free. In this case, you need to add up what it would cost to replace the essential services you provide. At a minimum, your spouse would have to cover childcare. If your spouse works full-time and would be raising the children as a single parent, should you pass away, you might want to factor in additional services like regular house cleaning, grocery delivery, and more.
Again, you can decide whether you want to cover these services until your children are adults, or just for a year or two after your untimely demise.
- Rules of Thumb Revisited
As described above, most rules of thumb for life insurance involve multiples of your salary. If you’re looking for minimum cover, I’d say stick with the tally of your basic liabilities and goals. This will be more realistic and likely more affordable than blindly following a rule of thumb. If room clears in your budget later for a more expensive policy, you can always add a second policy or increase your current cover amount.
However, if you are looking for your family to continue receiving the equivalent of your monthly salary for X number of years, then a multiple of your salary is a good approach to choosing the amount of life insurance to buy.
- Don’t Forget About Terms!
I’ve made the assumption that your search for life insurance will likely bring you to the conclusion that term life insurance will meet your needs. But there are other plans that might also fit.
If you’re debt-free, or at least largely debt-free, and your children are grown, you may not need a large life insurance policy any more. Since life insurance is cheaper to get when you’re young, consider taking out a sufficient policy as soon as you’re married or have your first child, and choose a term that should last until your last child flies the nest.
- Do You Need a Professional?
Comprehensive financial planning can be helpful in some cases, especially if you can get a financial plan without paying a huge fee. With that said, choosing the correct life insurance term and amount isn’t rocket science if you walk through these steps.
Don’t put off getting a life insurance policy just because you aren’t ready for financial planning services. Get at least enough to cover your basic needs. You can always ask for advice later if you decide you might want to increase your policy, or if you wind up in a trickier situation such as figuring out how to provide for a child with disabilities.
If you’re still not sure what level of life insurance you really need, consider checking out Low Cost Life Cover .ie a life insurance broker, that helps folks find the best policies, compare offers, and understand terms.
- In the event of calamity, having some life insurance is better than having none. Don’t put off the decision.
- You can always layer cover using multiple policies, meaning if you didn’t buy enough cover the first time, you can get additional cover through another policy.
- People joke that you want to have enough cover to make your spouse comfortable, but not enough to make them too comfortable with the idea of living without you. There might be something to that.
- Perks and rewards are obviously secondary to premium amounts and cover, but different insurers offer different benefits and features. Check to see if you receive any premium back at the end of your term, additional accidental death payouts, and terminal illness payouts.
- Unless you have a particularly complex life situation, you can probably choose a good life insurance policy on your own.
To get a quote on term life insurance click the link below
Low Cost Life Cover is an independent broker with agencies with all the major insurners Zurich, Royal London Ireland, Irish Life, Aviva and New Ireland. It is our job to provide you with the best independent advice that is the most suitable for your needs. I would be happy to discuss your individual needs if you have any questions give me a call 01 6853818, I’m from Donegal I love to talk!