How much life cover do I need? Making financial decisions about your life insurance is important and beyond having life cover, to cover your mortgage loan (mortgage protection), if you have a family that depends on your income, you need adequate life insurance too!
Yet, it can be difficult to kow how much life cover you really need and for how long, but don’t worry, we are here to help!
How much life cover do I need?
Arranging adequate life insurance is about replacing the portion of your income that would still be required by your dependents, should the worst happen and your income be lost.
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On average, your total amount of life cover should equate to 2/3rd of net annual income multiplied by your number or years to retirement.
Remember with you out of the picture, your own living costs are gone and your mortgage should be cleared (through mortgage protection), so life insurance cover should be sufficient to replace: Dependents expenses up to your retirement age, plus funeral expenses.
So, if you’re aged 40 with a take-home pay of €2,500 per month and retiring at age 65, you should have a total life cover amount of:
(2,500 * 0.66) * 12 * 25 years to retirement = €495,000
From this deduct any existing life insurance not assigned to a loan and any employer-provided death in service benefits. Excluding the family home, you could also deduct the asset value of any other property, or investments that you may leave behind, if applicable.
Including your partner
If your partner brings in an income, you may also want to cover this on the same basis as described above. If they are a stay at home parents don’t forget their loss would also result in new expenses such as childminders.
You can put two partners on one policy, and set it up on either a joint or dual basis.
Joint life pays out only once on the first death and the policy then ends, whereas dual life will pay-out on both people.
How Much Life Cover do I need? – Post Retirement
By the time, you retire your mortgage should be cleared so that expense is gone and if you have dependents they would be ideally fending for themselves by then. But you still might want to leave some money behind or cover funeral expenses.
Therefore, a convertible term life insurance policy which has higher coverage to retirement age and the option to convert to a new lower cover policy, without having to provide any fresh medical evidence, is the ideal solution for most people.
How Much Life Cover do I need? – If I have substantial assets
Most people need not concern themselves about inheritance tax that their spouse or children may encounter following their death. The family home will pass to a civil partner, or spouse free from these taxes.
However, if unmarried your partner could face a massive bill, while your children on the other hand are not taxed until they reach their current tax free threshold, but beyond this, they will be taxed.
An unmarried partner has no tax-free threshold, so they could be hit for this tax in full, paying a tax of 33% on the assets they inherit.
If you need to protect your unmarried partner or children from inheritance taxes, then you should take out a whole of life insurance policy to take care of this. It is known as section 72 life insurance policy and is for this specific purpose.
Ken O’Gorman – QFA
OneQuote.ie – Smart Financial Protection