According to statistics revealed by SunLife, 29% of people take out life insurance when they take out a mortgage.
And of those who do, many are under insured to the tune of £31,500.
That’s only in relation to the cost of paying off a mortgage.
The Association for British Insurers reports that one in four breadwinners do not have a life insurance policy in place at all.
For many, the topic of life insurance just isn’t one that’s top of their mind.
There are certain key stages in life when people do take action and consider life insurance products.
The most common life stages are:
- When buying a house (taking out a mortgage)
- The birth of a child
- After marriage
Advice is often sought because without expert advice on what’s available and what needs considered, people would be flying blind, plucking a sum from thin air and using that figure as the basis for the amount of cover they get insured for.
Do you know how much your total life insurance policy needs to cover?
It’s impossible to predict with precision what money your family will need in the future, but there are things you can do to get a more detailed picture of the money your family will need if the worst happens and they are dependent on the life insurance payout.
Life insurance is much more than mortgage protection when you consider the long term financial protection it offers your loved ones. All of which are well worth your time considering before you put an amount to the level of cover you buy.
Costs are continually rising, which is why – as a rule of thumb – it’s advised to have life insurance to the value equivalent of ten times the annual salary of the highest earner in the family household. That’s only a guideline though, because there’s other factors that will influence how far the value of your policy will go for your family.
4 things to impact how far your family’s life insurance payout stretches
Living expenses
Living expenses are certain to rise. Things are expensive enough just now, so it’s scary to think what money will buy a few decades from now. Yet that’s something you need to consider; the rate of inflation.
To help you gauge how much money your family will need in the future, you can use the Consumer Price Index (CPI) to get a rough idea. Going by current data, it’d be reasonable to expect inflation to rise at a rate of 1.5% per year.
The CPI is updated annually so it’s always worth keeping an eye on it so you know the outlook of the economy. When that changes, so does the cost of everything and that’s every year.
Time (for families)
You can’t put a price on the time you spend with your family, but you can put a price on someone else’s time. If something were to happen to the main breadwinner of a household with dependent children, your partner is entitled to bereavement leave, which doesn’t have to be paid by his or her employer. At some point though, they will need to return to work. When that time comes, they’ll require someone to help with childcare.
Childcare is vital because without it, a single parent would be unlikely to work, and if they did, it would be a struggle and likely lead to financial hardship. Statistics published by Gingerbread – A UK charity working with single parent families – report… “Single parents’ risk of poverty has fallen over the past decade, yet those in single parent families are still nearly twice as likely to be in poverty as those in couple parent families”. The cost of childcare provision can’t be underestimated.
Statistics published by the Childcare Cost Survey in 2015 by FamilyandChildCareTrust.Org show that…
- “Sending a child under two to nursery part-time (25-hours) is now £115.45 per week” This is a 5.1 rise since 2014.”
- “The cost of part-time care from a childminder has also risen – by 4.3 per cent – and now costs £104.06.”
That’s only in relation to childcare costs and not additional expenses. So, it’s definitely something parents need to consider for life insurance policies, as a measure of protecting your family from falling below the poverty line.
Debts
Debt costs money and unfortunately, a sign of our times is that we get ourselves into debt for things we don’t particularly need. Finance can be somewhat too convenient. You may remember a time from past generations when your grandparents would say “if you don’t have the money, don’t buy it”. The principle was simple. If you wanted something, you saved and bought it. A sign of the times is that savings aren’t as advertised as much as credit deals are, making it all too easy to accumulate debt.
The washing machine breaks, no savings to dip into, an easy £300 cost, with an additional interest charges added to that, usually in the region of 30% of the purchase price. A significant amount of household expenditure is spent solely on interest.
Statistics from TheMoneyCharity.org.uk show that….
“Based on October 2016 trends, the UK’s total interest repayments on personal debt over a 12-month period would have been £50.831 Billion.
- That’s an average of £139 Million per day.
- This means that households in the UK would have paid an average of £1,883 in annual interest repayments. Per person, that’s £1,007 – 3.83% of average earnings”
That’s only for personal debt and excludes mortgages. “The average total debt per household – including mortgages – was £55,855”. The average life insurance payout in the UK is £51,500 – You don’t need to be a math genius to see there’s a problem with those figures.
Senior Years Care Costs
The purpose of life insurance is to provide financial support to your loved ones when you’re not around to provide it. To ensure your partner has the money he or she will require to live comfortably into his or her senior years, it helps to work the cost of this into the total sum of life insurance cover.
Using your postcode on the BBC website here, you can get a rough guide on what it costs now for social care in your area. After reviewing the cost of social care at present in your area, you may find that the cost of personal care could be around £20 per hour, with your local council providing on average eight hours of personal care per week. It’s not something that will give you a final cost of social care for later in life, but it is certainly something worth considering when you’re taking out a life insurance policy to financially protect your closest life companion.
In Conclusion
The general rule of thumb that many go by is that when you’re buying life insurance, you should be purchasing a level of cover equivalent to ten times your annual salary.
This may be true for some people however, depending on your age, health, and current finances it’s not a hard and fast rule to stick by. For example, for parents with young children, it’s estimated that the cost of raising a child from birth until they reach 21-years old is an average of £30.23 per day.
It may cost an average of £104.06 per week in childcare, but when you add in everything else that needs bought, the cost of raising a child is significantly higher and therefore will affect the amount of cover you need your life insurance policy to cover.
For those who have life insurance, it may be worth reviewing what your policy is really worth. For those without any life insurance, it’s worth considering the points above to decide on a reasonable level of cover that you’re loved ones will need.
By thinking things through carefully, you’ll be able to leave behind enough money for your family to live comfortably, within their means and not fall on hard times because of a lack of insight into future finances.
You can’t control the elements of how they spend policy payouts, however, by considering what your family is likely to need, there’s less risk of under insuring the value of your life insurance policy.