How much life insurance is enough?

It is a conversation most of us would prefer not to have, but for those with significant others or dependents, it’s worth taking the time to consider how they would be protected financially in the event of your death.

Maybe you have no cover in place, or maybe you have some but are unsure whether it will be enough to provide for your loved ones. You may even have some cover that you didn’t know about.  Either way, how much cover might you need?

The following 4 steps may assist you in determining the level of life cover you may need.

Step 1- Work out how much cover you can afford

Simple term life insurance doesn’t have to be expensive. Depending on your circumstances, one could get a 30 year policy for a non-smoker providing cover of €200,000 taken out at a cost of a little over €15 per month, less than the amount that many of us spend on coffee on a weekly basis.

Add-ons such as critical illness increase your monthly premiums and in some cases can make the policy very expensive.

There is little to gain from taking out a policy for a level of cover that you will struggle to pay on a monthly basis. Life insurance is about giving you peace of mind rather than being a constant source of worry.  It makes more sense to consider this at the start of the process rather than the end.

Step 2-Consider the term you will need 

Not everyone needs life insurance. If you have no dependents, it’s unlikely you will need life cover unless the bank requires it as part of a condition of a loan. If you do have children, you will want the comfort of knowing that you have life cover in place to provide for them until they are of an age where they can provide for themselves. Until recent times, many considered this to be until their children reached the age of 18 or finished full time education, however many now extend their period of cover until their children are in their mid 20s as many younger people are taking longer to establish themselves in the workplace.    

If you have two children under the age of five, this means you may be looking at a term of 20 years or if your children are closer to 15 a term of 10 years may be sufficient. 

Step 3-Consider your needs

It’s the million dollar question – how much cover do you need? Unfortunately, there is no quick answer to this question.

Rule of thumb suggests that the younger one is at time of death, the more money your family will need to replace the income lost as a result upon death.

Somebody dying at the age of 30 will need to replace an extra 10 years income when compared to somebody who dies at the age of 40.

A parent will need life cover, regardless of whether you work or not, unless their financial circumstances are such that they have adequate assets to provide for their children in the event of the death of either or both parents.

Independent reports indicate that a homemaker should “earn” around €60,000 per year for what they bring to the household as the stay at home parent with primary responsibility for looking after the children and their needs.  Consider the financial impact that the death of a homemaker would have on the earning ability of the main income earner in the family? 

If the main income earner wanted to continue working, he or she would have considerable childcare and  housekeeping expenses when compared with costs before the death of the homemaker.  Notwithstanding that the family home would more than likely become mortgage free as a result of the payout on a mortgage protection policy, the additional childcare and housekeeping expenses should still be considered.

The stay-at-home parent should be insured for an amount relative to what it would cost to replace their duties in the event of their death.

Step 4-Consider what existing protection you might already have

If you own a property, you will more likely already have mortgage protection, which means that should you die with an outstanding loan on your home, the mortgage will be cleared and the property passed on to your next of kin.

Mortgage protection is typically cheaper than a broader life assurance product and, as such, is one that many people opt for when taking out life cover. A 35-year-old non-smoker could get cover of €300,000 over 30 years for a monthly premium of €26.09, or €200,000 of cover over 30 years for a monthly premium of €14.80.

The downside of this type of cover is that it allows little flexibility and the level of cover declines in line with your mortgage as it is repaid. So while your mortgage will be cleared in the event of your death, there is a chance that there will be little or nothing left over for other expenses or to provide for your next of kin.

Many employers provide their employee’s with a life assurance-type policy, more generally known as death-in-service benefit, which in the event of your death would be paid to your next of kin. It would be common that such policies would provide cover of up to 4 times an employee’s annual salary. It’s worthwhile checking your entitlements before you take out an additional insurance policy as you may already have some cover already in place.

If you are interested in reviewing your life cover contact us on 021 4641480 or email info@qwm.ie