Do I Need Life Insurance And If So How Much? - August 23, 2008 -

A question that any person concerned about sound financial planning should always ask themselves, but how do you work out the answer? In order to establish if someone needs life insurance you first need to ask yourself a very simple question. In the event I die will anyone be financially worse off?

In the question "will anyone" that refers to not only family dependents but can also mean lenders or business partners, just about anyone really. So in other words if you die and someone needs money as a result, you will need to sort out some sort of insurance. So before we look at family protection lets deal with the most common need for life insurance and that is to cover a lending institution such as a mortgage company.

If you owe money and you die the lender will be financially worse off in so much as you will not be around to pay their loan and therefore they will lose their money. So in the question above they are the individual who will be worse off in the event of your death. With that in mind if you have say a 110k mortgage or loan you would be well advised to have 110k life insurance which would in turn pay out and repay the loan to the lender in the event of your death.

Moving onto protecting your family dependents, again in the question above they can be considered the individuals who would be deemed financially worse off in the event of your death. It should be said that you would also want them protected because you work to provide a certain lifestyle for them and you surely would want that lifestyle to continue even if you were not around to maintain it.

Unlike mortgage protection were there is a fixed debt and therefore a fixed sum assured, taking out life insurance to protect your family is a little more complicated. This is due mainly to the fact that the need is a bit harder to quantify. To do this you first need to establish what would be lost in the event of death. This is done usually by coming up with a figure similar to the amount of income that is produced by the life assured. For example if you are on a 20k per annum salary, then it would be prudent to have cover that would generate that amount of money in the event of death. This can be done by taking out a plan that pays out an annual benefit of the 20k per annum or arranging a plan that will generate a lump sum that can be subsequently invested to produce the 20k.

If you do need to arrange a lump sum insurance plan you will need to know how big a lump sum is necessary. Whilst there are a lot of calculators on the internet designed to give you an idea of how much you would need in order to generate an income of a set amount, they do rely on assumptions of investment growth and inflation. However it is not considered unacceptable to taker out a lump sum for about a multiple of ten of what is required as an income. So in this example you would need a lump sum life insurance plan for 200,000k. This theoretically in turn could be invested to possible generate the 20k per annum into the future as income.

So in summary, the need for life insurance is defined by the answer yes someone will be worse off in the event of my death and the amount necessary is defined by establishing the amount either needed to repay liabilities or the amount lost in the event of the death.

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