Working out the insurance cover you need is straightforward, if you follow some simple steps.
Most people need two types of insurance:
- Life insurance - pays your beneficiaries a lump sum upon your death
- Critical illness cover - pays you a lump sum in event of a serious illness
Working Out How Much Life Insurance You Need
The payout from your life insurance policy serves two purposes:
- Pay off outstanding debts
- Provide a source of income for a certain period of time
Covering Debts
As far as clearing debts is concerned, the most important is usually the mortgage on your home. Especially for families with children, the security of knowing there will always be a roof over their heads is a comfort. And if you don’t yet own a home, consider whether your life insurance should provide funds so that something can be bought.
You may also have other liabilities such as bank loans, that you should provision for.
Another important consideration is the cost of education, and this includes schools as well as university. Education-fee inflation has been running at a much higher level than general consumer inflation, and all indications are that this will remain so for many years to come. Many parents struggle to fund education fees from income, and a key component of financial planning nowadays is advance saving for university expenses.
Therefore, consider seriously if you wish to ensure your children will have opportunity for a good education, in the event that you may not be around.
Providing Income
If you are the main earner in the family, and have a young family, how much income will your spouse and family need to survive – and for how long – in the event of your demise? A simple multiplication will give you an approximate figure.
Working Out How Much Critical Illness Cover You Need
Critical illness cover pays you lump sum if you are diagnosed with one of a list of about 35 serious illnesses, disablements or medical interventions. These are for example: major cancers, heart attack, coronary artery by-pass surgery, stroke, Parkinson’s disease, and blindness, amongst others.
Many of these conditions can require a long programme of treatment, with perhaps an extended recuperation period, during which you may be unable to work. So what about your income needs during this time?
A good level of critical illness cover to consider is around two times annual income, or three time annual expenditure.