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How much life insurance do I need?

We aim to answer your top questions about calculating the right amount of life insurance

A photo of Daniel Sharpe-Szunko, the author

By Daniel Sharpe-Szunko

Published on: 16 December 2021

6 min read

How much life insurance do I need?

Another pretty common question that people ask about life cover is ‘how much life insurance do I need?’. It’s a great question and the fact is that there is no real right or wrong answer, as long as you have enough cover or whatever amount is affordable. 

Each person will have their own perceptions of what they think is enough cover, which might be completely different to someone else. Ultimately it’s down to your attitude to risk and your own financial circumstances. 

In this section, we look at how much life insurance do I need for various situations and how it might work for you. We’ll aim to answer your top questions about calculating the right amount of life insurance and look at some of the top potential pitfalls. 

Question: How much life insurance do I need? 

Answer: You should make sure that you have enough to protect your family and your home if you were to die. 

For more general information about life insurance, you can read our MPO Life Insurance Guide.

How much life insurance do I need calculator 

There are many different ways to calculate how much life insurance you need and as we said above, there’s no actual proper calculation. There’s a lot to think about when you take out a new life insurance policy. 

Here we’ll look at how to try to calculate how much life insurance you might need to protect your family and your home. 

Remember that life insurance is to replace any lost income from someone who passes away in the household, in the form of a lump sum payment. Some of the key elements to this that you’ll need to consider are things like: 

  • Loss of earnings (either main breadwinner, secondary income, or carer) 
  • Parental responsibilities (single parent situation) 
  • Business and work (continuation of business or job) 

Assessing your options and having a good idea of what you need before applying can help you save a lot of money long term. Find out more in our guide ‘Clear planning for life insurance’.

What should I protect with my life insurance? 

There are some fairly standard rules that apply to most people when you’re considering ‘how much life insurance do I need?’. As a rule of thumb the obvious things to protect are mortgages and income, but then there might be a whole host of other things that can vary from one person to another. 

The main elements that people would want to protect with their life insurance are: 

Calculations will vary dramatically for each household because everyone’s circumstances are unique. Your affordability and attitude to risk will also vary, so this is why it’s so difficult to figure out how much life insurance is right for you. 

Mortgage life insurance 

Your biggest debt that you will most likely have in your lifetime will be your mortgage on your home. 

Homeownership in the UK is a major part of the economy and we are a nation of house buyers and property owners. According to recent UK Mortgage statistics, around 37.5% of the UK population is a homeowner with a loan secured against their property. A further 27.6% of the population owns a property without any secured loans or mortgage debt. 

As far as mortgage life insurance is concerned, there are only three main things to think about: 

  1. Type of mortgage (e.g. Repayment or Interest Only) 
  2. Amount of mortgage (i.e. Current mortgage balance) 
  3. Term of mortgage (i.e. how long is left to pay off your mortgage) 

You should be able to get this information from your mortgage lender, if you don’t know it already. Alternatively, you can register for Free Credit Score systems such as ClearScore which will usually have some of the information as well. 

Debts and other credit 

Most people will have varying levels of debt throughout their lifetime so this figure can vary over time. 

One of the easiest ways to look at this, is to take an average of your outstanding debts over the past five or ten years. You can use systems like ClearScore to give you an idea of your current outstanding debts or credit. 

Common debts include: 

  • Loans (e.g. Cars, Home Improvements, debt consolidation etc.) 
  • Credit Card debt 
  • Store Cards 
  • Debt Management Plans 

Income replacement 

This can be one of the most difficult areas to calculate for life insurance because there are so many different levels and types of income. We also know that income can vary over time and people change jobs from time to time as well. 

If you think about roughly how much you contribute to the household from your earnings each month, and then what your partner or children might need if that income was lost. Some people use a calculation of five to ten years of their income, depending on what it affordable, as a starting point. 

There are other types of income replacement policies for life insurance such as: 

One of the main reasons that people take out life insurance is family protection for their children or other dependents, such as elderly parents. Life insurance is designed to help you protect your loved ones and provide vital financial support if you were to pass away or be diagnosed with a terminal illness (terminal illness benefit).

There are some key points to consider when thinking about the level of cover you might need for your family, such as: 

  • Age of dependents 
  • Number of dependents 
  • Level of dependency (e.g. carer or parent) 
  • Expected age of non-dependency 

For example, parents with a young family might want to consider what might happen if one or both of them were no longer around. This can be a difficult for any parent to consider but the reality is that this can happen unfortunately. 

Any existing cover or policies 

Some people might already have some cover in place, either from their employer (death in service) or from a previous mortgage arrangement. 

It’s not always best to cancel and replace an existing life insurance policy, so you might want to consider topping up rather than replacing. There are a number of reasons why you might not want to cancel your existing cover, such as, it might be cheaper and better to keep existing cover. This especially true if you have pre-existing conditions that may make it harder to find cover again elsewhere.

You can have multiple life insurance policies, so there is nothing to suggest that topping up an existing policy might not be best. 

You can learn more about how to adjust an existing life insurance policy in these MPO guides:

Affordability and reducing the cost of life insurance 

The most important bit of all when buying any life insurance is to make sure that it is affordable, both now and in the future. Life insurance works to protect your home and family, but you need to make sure you will be able to pay for your premiums in the long term.

We know it can be difficult to forecast whether you’ll be able to afford to keep paying your premiums in several year’s time. You should at least know whether you can afford the cover now and whether you might be expecting any changes in your income in the foreseeable future. 

If you cancel your life insurance because you can no longer afford to keep paying the premiums, you will lose those terms that the policy has been underwritten on. Life insurance premiums get more expensive as you get older (and can be higher depending on the type of life insurance), so cancelling and restarting a policy can be more expensive. 

You should also speak to your insurer if you are no longer able to make the full payments to see whether they can offer you any alternatives. 

There are also several things that you can do to reduce the cost of cover: 

  • Sum assured (reduce the amount of cover if you can’t afford the full amount) 
  • Term (shorter terms are cheaper so you can reduce the number of years) 
  • Shop around (premiums vary from one insurer to another) 
  • Speak to an insurance expert (can help you to get lower life insurance rates) 

There are other ways to reduce your life insurance premiums so you might want to speak to an independent insurance expert to see what your options are.

We also have several handy guides dedicated to how to save on your policy:

Resources

Scottish Business News – Interesting facts and figures about life insurance in the UK

Finder.com – Life insurance statistics

Statista – Life insurance industry in the UK: Statistics & Facts

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