We all have different attitudes to risk and we approach life with varying degrees of caution. Where some of us will want to provide everything and more in the event that we're no longer around, others are happy to protect the essentials. There is no right or wrong to this but if you're at the 'more is more' end of this spectrum then you might be wondering, 'how much life insurance can I have?'.
I've often been asked this question and the answer is quite simple. You can have as much life insurance as you can justify. Now, you might be wondering how you justify the amount of life insurance you need and this is where it gets a little complex, but stick with me as I show you how to work this out.
How to work out how much life insurance you need
Although there is no hard and fast answer to this, there are a few ways to work this out. Remember that you won't have to justify the amount of life insurance that you want unless you want quite a large sum. We'll look at how high sums of insurance are justified further on in this article.
Below we provide a simple table to help you roughly work out how much life cover you may need.
|Status||Guidelines on how much life insurance you may need|
|Person with dependents and earns an income:||The annual amount of money that you contribute to your household to keep it running, multiplied by the number of years you need this to continue. Then add the value of your outstanding debts/mortgage and the cost of a funeral.|
|Person with dependents and doesn't earn an income:||The cost of replacing your function within your household (this could be the caring duties that you perform) multiplied by the number of years you need this to continue (this could be linked to how long you would continue to provide care). Then add your outstanding debts/mortgage and the cost of a funeral.|
|Person without dependents and earns an income:||The value of your outstanding debts/mortgage and the cost of a funeral.|
|Person without dependents and doesn't earn an income:||The value of your outstanding debts/mortgage and the cost of a funeral|
Useful Tip 1 - You can reduce the value that you calculate by any savings that you have as well as any costs that will stop if you die. Then you may want to add things like school/university fees for your children or other costs that you anticipate for the future.
Useful Tip 2 - When you're working out how much life insurance you need, remember that your family won't see the value of your life insurance unless you die, so sticking to what is needed is usually a good idea. The more insurance you want, the more it will cost you and you don't really want to pay out more than you need to.
It's perfectly understandable if at this point you start to feel that you're not equipped to work out how much life insurance you need and balance this with what you can afford to spend on it. If that is the case then I would recommend that you get a life insurance specialist* on your side and talk it through to get some bespoke advice. It won't cost you anything and you'll have the peace of mind that you've covered all the bases.
Life insurance - justifying how much you want
There is a difference between what you 'need' and what you 'want'.
'Need' can be worked out by looking at your financial commitments as we've discussed above. A specialist life insurance adviser will ask you all about these facts and work out what the financial loss will be to those you leave behind.
In reality, you can insure around £2 million as a lump sum life insurance without having to provide any financial evidence to justify your need for it.
Different insurance companies have different limits before they start asking you for evidence to support the value you're applying for. With some insurance companies, the amount will be lower than £2 million and others it will be higher.
You can apply for life insurance up to the limits without proving that you need it. If you've enlisted the help of a specialist life insurance adviser, they will steer you in the direction of what you need but will make room for what you want too.
How to justify a larger sum of life insurance
If you do want to buy life insurance that takes you over the levels that require additional financial evidence, then you'll need to share financial information or evidence to support your application. The underwriters (people at the insurance company who assess your application) may ask you to complete a financial questionnaire and/or provide evidence to support the amount of life insurance that you have applied for. It is also likely that you'll be asked to attend a full medical examination and the underwriter will write to your GP for a copy of your medical records.
To help frame this a little, I've used Royal London's limits and requirements as an example. The following information shows you the levels at which you would be asked for more financial evidence and also what sort of evidence you'll need to present.
Example: Royal London's Financial underwriting limits
|Financial Evidence Requirements||Additional financial information is NOT usually required||Financial questionnaire required||Financial evidence required|
|Life Cover||Less than £2 million||More than £2 million||More than £3.5 million|
|Critical Illness Cover||Less than £800,000||More than £800,000||More than £1.5 million|
Example: Royal London's Financial Evidence
|Reason for cover||Supporting evidence|
|Family Protection||Evidence of income from employer or accountant (P60 or equivalent)|
|Inheritance Tax||Accountant's or solicitor's letter to confirm the value of the estate|
|Loan or mortgage cover||Copy of offer letter or loan/mortgage agreement.|
How to arrange your life insurance at the best rates and with the greatest ease
Average mortgage debt in the UK is around £150,000 and when you consider that the average cost of running a household is £2,500 per month, you can see how the financial impact of death can reach nearly £750,000. There will be many households where the impact is higher than this.
There are specific types of life insurance policies that will provide an income for your family, instead of a lump sum, which might suit you better too.
The best way to be sure that you're insuring yourself for the right amount and balance this with cost and ease of application is to speak to a life insurance specialist*. They will conduct an analysis of your circumstances without too much work, find the best solution and guide you through it. Advisers who are regulated by the financial conduct authority have a responsibility to provide you with the right advice for you.
At Money to the Masses, we have vetted a company that provides advice in this area. The advisers are trained to match you to the right products and find the best premiums for the products. You will be guided through the process by the same adviser throughout the process. To arrange a callback from a qualified adviser, simply complete this form*. Additionally, as a Money to the Masses reader, you will receive £50 cashback once you have arranged your policy.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch