Life How to decide how much life insurance you need?

[Toby]

Is there a way to calculate the amount of life insurance a couple with 4 very young children should get please?

 

[Ravima]

What do you earn? what are your outgoings? do you have life assurance provided by your employer/pension scheme? have you a mortgage with or without mortgage protection?

Not an easy question to answer. You need to try to provide that any debts are cleared on death, hence mortgage protection. If you have that, then you need enough money to provide some decent standard of living for your spouse and children (until he/she remarries and the new spouse takes over!!).

It also depends on your age, spouses age and ages of any children. You should try to provide enough money for spouse to live in the standard he/she is used to as well as providing for children's education.

Some people say that you should have a multiple of salary, but if you have widows &orphans scheme through pension, then the multiple would be lower than if you don't.

Interest rates are 3 to 4% at present, so €100K invested would bring in €4K. Try working out a multiple, taking into account that spouse & kids can also eat into the lump sum.

 

[declanja]

I know it is not exact but I took out life insurance on the basis of three years earnings cover. So if you or your spouse earns 50K each, take out 150K insurance on each life. Its just a ball park figure to go on.

 

[LDFerguson]

It's a great question, and something I've been banging on about for a good while. People should avoid taking out almost random levels of life insurance cover. This is one method: -

1. What's the net income of each partner?
2. If one partner stays at home, what's the cost of childcare?
3. If mortgage is already covered by a Mortgage Protection life insurance policy, deduct the monthly mortgage repayment from net income figures.
4. You're left with the amount of net income to be replaced in the event of death.

You can arrange a life insurance policy to pay out the monthly income figure arrived at in 4. above for an agreed term. Or you can capitalise this figure, i.e. calculate a lump sum that will provide the same income for the same period.

When you know the amount you need, then reduce it by any existing cover (including workplace death-in-service schemes or death-in-service widow's pensions). Take account of any savings and investments you have. Bear in mind also that if either or both partners have Defined Contribution pension funds, in the event of death the value of the pension fund goes to the estate.

If there are future liabilities that would not be paid from normal household income (e.g. college fees) then these should be accounted for separately.

Liam D. Ferguson