Everyone is different and people tend to have unique needs even when it comes to life insurance but there are basic ‘rules of thumb’ when it comes to deciding on the cover amount and what should influence your decision.
The amount of cover therefore largely depends on what you need the life cover for to begin with. Is it to protect your financial dependents, protect your debts like mortgage, to just leave a lump sum for your loved ones or pay off inheritance tax?
Financial dependents: This is when as a breadwinner, you are taking term life insurance for income replacement in the event you die whilst they are still financially dependent on your income. Are you a parent or breadwinner? If so, how many children or dependents you have? Having spouse, children, parents or relatives who are financially dependent on you is a big factor only in making the need for life insurance urgent but also how much?
The age of your financial dependents especially children is a very crucial factor. The younger the dependents the longer they need you as a breadwinner and also the higher the amount needed.
Your age as the breadwinner also matters. How many years do you have before retirement? Will you still be having financial dependents in retirement and if so for how long and up to what age does the insurer allow your life insurance to go to? Other things permitting the key guide is to match the period when are going to have financial dependents and the term of the life insurance. The ideal life cover for financial dependents is a level life insurance.
Debt redemption: This comes into play when the main purpose of you taking a life insurance is to pay off debts like your mortgage in the event of you dying before it’s paid off. In such situations the key consideration should be the term of the debt and if mortgage, whether its repayment or interest only. Mortgage Protection Insurance is a form of life insurance that is designed and matched to redeem a mortgage balance should you before it’s paid off. Repayment mortgage goes with decreasing life insurance and interest only mortgage with level life insurance as the exposure is not reducing over the loan term.
Lump sum inheritance gift or inheritance tax bill settlement: This is one of the key motivating factors why you need life insurance or life assurance to start with. If the drive is to live your loved ones a lump sum as part of their inheritance or to get a tax-free lump sum on death which will be used to pay off inheritance tax bill then the best cover is a life assurance or whole of life assurance.
Other key universal considerations include things like your lifestyle, savings and affordability.
Your lifestyle will also affect your premiums. As an example, smokers or people who drink a lot of alcohol will pay more for their life insurance as they are deemed to be higher risk, due to possible ill health.
If you got substantial savings relative to your exposure or risk, you want covered then that could also affect not only how much life cover you need but whether you really need life cover at all.
Affordability is a key consideration. How much you can actually afford to pay for your life insurance in monthly premiums. Life cover is so important and its always a great move to sacrifice a bit of your disposable income to protect your loved ones and have some peace of mind.