Life insurance can be used to help your loved ones to take care of key financial commitments should you pass away whilst cover’s in place.
How much cover you should take out can often be calculated by working out the sum of all of the financial commitments you currently have as well as other costs your family would need to cover after you’re gone.
Mortgage payments
Are you a homeowner? According to research the average UK mortgage debt is £131,724[1].
To ensure your family home is secure, you’ll want to make sure your life insurance cover amount is at least enough to cover your remaining mortgage balance.
This means that if the worst were to happen, your mortgage could be cleared and your loved ones can remain in the family home - without having to worry about finding the funds to keep up with payments.
If you rent a property, the funds can be used to cover monthly rental payments.
Household expenses
Protecting your mortgage is likely to be of utmost importance. However, could your family afford to run the home and cover ongoing bills without financial support?
You may need your life insurance to cover the following expenses too:
- Gas
- Electricity
- Water
- Council tax
- Property maintenance/repairs
- Internet/phone/broadband
Future family living costs
If you’re a mum or dad you’ll want the peace of mind that your family will be able to continue their current lifestyle even if you were no longer around.
Your life insurance pay out could help cover the following ongoing family living expenses:
- Food/drink
- Clothing
- Holidays
- Car/fuel
- Education fees
- Leisure activities
In order to meet these on-going living expenses, you may consider family income benefit (FIB).
FIB provides monthly income payments to your loved ones rather than a lump sum pay out, which can help with long term family budgeting.
A family income benefit policy can be taken out alongside a standard life insurance policy. For example, a decreasing term life insurance policy to cover your mortgage and a FIB policy to protect living costs.
Education expenses
If you have children, then education costs may need to be factored in to the level of cover you need.
Your child will go to school for a minimum of 11 years, then potentially two years of college and three or four years at university.
While the core education system in the UK is often free, you may be required to cover:
- Private school fees
- University/tuition fees
- School trips
- Uniform/sports kit
- Books equipment
- Travel to and from place of learning
Outstanding debts
If you have any outstanding debts these could be recovered from the value of your estate if you were to pass away, meaning there could be less funds for your loved ones.
Common debts that could be taken care of by a life insurance pay out include:
- Car finance
- Credit card bills
- Overdraft
- Personal loans
A life insurance pay out can help to replace any funds which are taken from your estate to cover these, so your loved ones are left more financially secure.
Replace an income
If your family rely on your income to keep on top of key financial commitments, they may struggle financially after you’re gone.
Especially if your partner is a stay-at-home parent, childcare may need to be taken on to allow them to return to work - adding another expense to the mix.
It’s possible to work out how much life insurance you need by multiplying your salary by the number of working years you have left (until you reach retirement).
This way your loved ones can budget their pay out and continue living their current lifestyle.
Did you know you can also protect your income during your working life? Why not check out our income protection page to find out more?
Inheritance
You may want to leave an inheritance for your children and/or grandchildren after you’re gone.
This can be provisioned into your life insurance pay out and your policy may be able to be written in trust to avoid/minimise 40% inheritance tax.
Inheritance laws state that if your estate is valued at over £325,000, then any amount over this threshold is taxable by 40%.
Many UK estates easily exceed this threshold as estates include any property, money, possessions and life insurance policies you have.
Writing your life insurance in trust detaches the value of your life insurance from your estate so your loved ones get a full pay out.
Funeral costs
The average price for a funeral is currently £4,056. If we factor in all the associated costs this rises to a staggering £8,864[2].
It would be hard for many to find funds to cover this large expense at short notice, so the funds for your funeral can be factored into your life insurance policy to ensure this is covered when the time comes.
If you're aged between 50 - 85 it’s commonplace to take out an over 50s plan to cover these costs.
Alternatively, if you're aged between 50 - 80 you may consider a funeral plan.
For a free quotation to cover the cost of your funeral, simply get in touch today.
Source: https://www.finder.com/uk/life-insurance-statistics