Image by Laura Dye Photography
In our last blog post we looked at different types of life insurance cover. In today's blog, we try to answer the question of how much life insurance cover you need to adequately protect your loved ones if you die unexpectedly.
There are some steps you can take to make a reasonable estimate:
Add Up Costs and Debts
- Consider your current income, how long will your family be counting on this money? It could be for the rest of your life. Work out how much this would add up to if you died tomorrow.
- Typically, the cost of a funeral and estate settlement is £7,000, although that could vary depending on how complex your assets and liabilities are. Make a reasonable assumption and add it to your total.
- Make a full list of your current and future planned debts, and the amounts you still owe, including bank overdrafts, a credit card balance, personal loans, hire purchases or a mortgage. If you need help completing this list, look at your recent transaction history on your Money Dashboard budget planner. Add this to your running total.
- If you're not married there could be an inheritance tax bill to pay before any assets in your estate are transferred over to your partner, so total up your net assets and work out any tax bill from that (around 40%)
- Consider potential rises in your partner or family's living costs. Your partner's income might drop if they have to cut back on their working hours to bring up a family on their own.
- Also consider inflation over time and school or University costs for children.
- Add any other fees or one-off costs you can think of that your family will have to pay if you pass away.
- Finally add an emergency fund just in case there are costs you aren't aware of.
- Create a list of your assets which can reasonably easily be turned into cash, such as your savings account, shares and similar investments. Money Dashboard budgeting software gives you the current balances on all your accounts. Take this figure away from your running total.
- Subtract anything your inheritors will sell, for the amount they will sell it for. Assume that they will get a bad deal, just in case they do. Don't include your home or furniture as your family will probably want to keep these.
- Subtract any pension or death in service lump sum payment you expect from your employer.
- If you have a mortgage protection policy, make sure you adjust for that too.
Finally, be sure to make a last will and testament while you are still here, as this will save your family time and money on solicitors when you die.