What do you need your life insurance to cover?

Life insurance provides a reassuring financial cushion for your loved ones if you’re no longer around to provide.

However, calculating exactly how much life insurance cover you need isn't always straightforward.

Everyone's circumstances are unique and therefore it requires careful consideration.

Using our life insurance calculator (below) will help you to determine not only the aspects of your life you need to protect but also how much life insurance is required.

Life insurance calculator

Enter your financial commitments to establish the level of cover you require.

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£121,687 is the estimated average outstanding mortgage per household in the UK.

Our property is generally the largest financial commitment any of us will make.

Your life insurance should cover this significant debt should you no longer be around.
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According to Money Advice Service, full-time childcare in the UK now costs £242 a week.

The loss of a parent could result in the need for additional childcare whilst the surviving parent increases their hours to account for lost income.

Your life insurance cover should factor in this additional required outgoing.
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The average level of debt (minus a mortgage) in the UK is £15,385.

Factoring in any outstanding debts in your name when arranging life insurance ensures this burden is not passed to loved ones.
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You may wish to leave your loved ones an inheritance or lump sum gift upon your passing.

Factoring in the gift amount when arranging your cover will ensure the pay out amount will be sufficient to provide your loved ones with this selfless gesture.
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According to SunLife, the average cost of a UK funeral is now £4,417, whilst the total cost of dying is £9,493.

This is a 130% increase over the past 16 years and shows no signs of slowing down.

A significant cost which should be factored into the amount of life insurance you secure.
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If you are one of the 65% of the UK who are lucky enough to have savings, this could be used as protection if you were to pass away.

Any pay outs from existing life insurance policies and investments can also be used as financial protection for your loved ones if you were no longer around.

Factor this into your required cover amount.
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Your total cover estimate

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Let us find your best available quote.

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Personal factors which will strongly influence the level of cover you secure include:

  • Whether you're a parent or have dependants
  • Number of children that depend on you
  • Age of your children, (how long until they are financially independent)
  • The size of your mortgage
  • Your age, (how long until you're at retirement age)
  • Your lifestyle
  • Whether you have personal savings
  • How much you can afford

To really work out 'how much life insurance do I need' let's look at the key factors, one by one...

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Mortgage repayments

Are you a homeowner? According to research from themoneycharity.org.uk the average UK mortgage debt is £121,687.

To ensure your family home is secure, you'll probably want to ensure your life insurance covers your mortgage.

This means if the worst were to happen your mortgage could be cleared, allowing your family to remain in their home and not have to worry about monthly repayments.

A decreasing term policy is commonly used to cover a repayment mortgage. As the amount owed on your property decreases over time, so does the cover amount. This is also the most cost-effective option.

If you rent, instead your pay out could cover your monthly payments until, for example, the children have left home.

Household expenses

Obviously paying the mortgage off is vitally important so not to burden your family with a huge debt.

However, don't forget there are also many on-going costs associated with running a family home.

You may need your life insurance to cover these future costs too. For example:

  • 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 reassurance that your loved ones would be able to continue their current lifestyle even if you were no longer around.

Your life insurance pay out could help enable your family to maintain their current standard of living.

You should consider the following ongoing family living costs:

  • 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).

In contrast to traditional life insurance which pays out a cash lump sum, instead, a FIB policy provides a monthly income for the duration of the policy.

A FIB policy could also be taken out in conjunction with life insurance.

For example, you may have a decreasing term policy to cover your mortgage and a FIB policy effectively replacing a lost income and meeting day-to-day expenses.

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Stay-at-home parent

When it comes to life insurance and working out how much cover you need, the stay-at-home parent is often overlooked.

People assume they need to cover only the family breadwinner. This is a common mistake.

Considering all the unpaid jobs a stay-at-home parent fulfils, replacing these roles would present a significant cost.

Take childcare for example. Could you afford fulltime childcare?

If no, you may have to reduce your work hours and therefore your salary in order to look after them.

Provide an inheritance

You may want to leave an inheritance to your children or perhaps grandchildren after you're gone. You could provision for this in your life insurance.

A key consideration here is tax.

Inheritance laws state that if any part of your estate is valued over £325,000 (if single or divorced), or £650,000 (if married or widowed), it's taxable at 40%

Therefore, if you own a property and have a healthy life insurance policy, many UK estates will easily exceed this threshold.

To avoid this you could write your life insurance in trust, at no cost to you.

Education expenses

If you have children then the cost of education may be a factor in the level of cover you need.

Remember, your child will go to school for a minimum of 11 years. Then potentially 2 years at college and/or 3 years at university.

  • Private school fees
  • University/tuition fees
  • School trips
  • Uniform/sports kit
  • Books/equipment
  • Travel to and from place of learning
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Critical illness cover

Statistics prove that you're much more likely to fall critically ill during your working life than pass away.

As a result, you may want to pay for additional critical illness cover, either as part of your life insurance or as a stand-alone policy.

This will provide you and your family with extra protection if you were to fall ill and unable to work.

All life insurance policies arranged through Reassured can include critical illness cover if required.

Outstanding debts

If you have any outstanding debts you might want to cover these with your life insurance too:

  • Car finance
  • Credit card bills
  • Overdraft
  • Personal loans

Without adequate cover, any outstanding debts in your name will be recovered from the value of your estate.

Funeral costs, (128% increase in 16 years)

If you're in your 20s or 30s, the rising cost of a UK funeral is probably not at the forefront of your mind.

At this age, you're probably looking for your life insurance to protect your first home or the living costs for your new-born.

However, as we age funeral costs become more and more of a factor.

The average UK funeral now costs £4,184 (SunLife), with all the associated costs this rises on average to a staggering £9,263[1].

If you're aged between 50-85 it's commonplace to take out an over 50s plan or a funeral plan to cover these costs.

For a free quotation to cover the cost of your funeral, simply get in touch today.

Employee benefits (death in service)

Some employers offer their employees some protection, like death in service.

If you benefit from such cover you may want to factor this into the level of personal cover you take out.

However, it's worth noting that if you were to change employers this benefit is highly unlikely to move with you.

How much is life insurance?

Once you've determined the level and type of life insurance you require, the next question is likely to be how much will life insurance cost?

There are many misconceptions surrounding the cost of life insurance with a report by Pacific Re suggesting people overestimate the cost of premiums on average by a staggering 394%[2].

These misconceptions could help explain why over 50% of us have no form of life cover. This cover gap, unfortunately, leaves many families in the UK financially vulnerable.

The good news is, at Reassured we can arrange life insurance from just 20p-a-day.

However, in reality, your life insurance cost on average is heavily dependent on your individual circumstances.

10 key factors which affect the cost of your premiums

Before establishing how much the average life insurance costs each month you need to understand the key cost factors:

  1. Your age - The younger you are when you take out a policy, the cheaper your premiums
  2. Amount of cover - The greater the cover amount, the higher your premiums
  3. Length of the term - The longer the policy term, the higher your premiums
  4. Type of life insurance - The type of policy you take out affects cost. For example, decreasing term cover, where the cover amount decreases over time, will be cheaper than whole of life insurance
  5. Health - If you have or have had any medical issues, such as diabetes or cancer, this will increase your premiums
  6. Weight / BMI - If you're overweight your premiums will increase
  7. Smoking status - If you smoke this will increase the cost of premiums
  8. Alcohol consumption - If you regularly consume high levels of alcohol this will increase premiums
  9. Lifestyle - If you regularly take part in extreme sports, do a dangerous job or regularly travel to dangerous countries this impacts premiums
  10. Family medical history - Even if in good health if there's a history of hereditary illness this can increase premiums

(Please note: When insurers work out the cost of your life insurance premiums they look at many different factors; however the above are the key points).

The type of life insurance policy you choose

Did you know that the policy type you choose has a major effect on how much life insurance costs?

There's a difference between life insurance, which pays out if you die and life assurance, which pays out when you die.

Term-based life insurance options only pay out if you die during the policy term.

Therefore, you can outlive your policy, hence there's less risk posed to the insurer and thus lower premiums.

  • Decreasing term - The cheapest option, usually used to cover a repayment mortgage, (but not much else). The pay out amount decreases over the term of the policy
  • Level term - More expensive than decreasing term, the cover amount remains level throughout the term. Often used to cover an interest-only mortgage
  • Family income benefit - Pays a regular monthly income instead of a lump sum, generally a cost-effective option. Commonly used to meet day-to-day living costs, effectively replacing an income

Life assurance policies pay out when you die and are not term-based.

As a result of a pay out being guaranteed, premiums usually cost more than term-based cover as the insurer knows they have to pay out.

  • Over 50 plan - As a result of guaranteeing acceptance if aged 50 - 85 and no medical questions being required, premiums are hiked to mitigate the risk posed to the insurer. These policies are often used to cover rising funeral costs
  • Whole of life - Cover lasts as long as you live and guarantees a pay out. As there's no set term, it's generally the most expensive option. Good for those who want to guarantee a pay out to provide an inheritance or meet funeral costs

Joint life insurance vs 2 singles policies

If you form one half of a couple, you may want to consider a joint life insurance policy.

The main advantage of a joint policy is that it's usually around -25% cheaper compared to the combined premiums of 2 single policies.

Whilst a joint policy is significantly cheaper, it'll only ever pay out once (usually on the first death).

In contrast, 2 single policies will offer 2 separate pay outs - double the coverage.

Also, if you have a joint policy and one of you passes away, it then leaves the remaining partner to either find a new policy when older (higher premiums) or be left without cover.

Fixed or reviewable premiums

When you take out life insurance you usually have the option of paying either a fixed or reviewable premium.

Fixed premiums are, as the name suggests, fixed throughout the policy term. You know exactly what you have to pay each month and can budget accordingly.

Reviewable premiums are commonly cheaper initially, but the insurer has the right to increase the cost at certain points during the policy.

As a result, reviewable premiums can often end up being more expensive in the long-run.

Compare life insurance quotes, (to secure the best deal)

As you can see, how much life insurance you need and how much you're likely to pay each month are very subjective.

Therefore, to ensure you receive the right cover at the best price, it's always recommended to compare quotes from multiple providers.

At Reassured, we can do exactly this on your behalf, comparing quotes from the market-leading insurers.

Our award-winning and FCA regulated service is fee-free. Why not compare quotes free of charge today and find your perfect policy?

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Sources:

[1] SunLife (2021), Cost of Dying Report, sunlife.co.uk/costofdying2021

[2] www.pacificlifere.com/content/dam/paclife_corp/pre/public/publications/pacific_momentoftruth_8pp_LOW.pdf

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