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How much do I insure my life for?

Life insurance is important if your loved ones are to be protected financially in the event of your death. While it’s not a savings plan and there is no investment element , if you pass away during the term agreed, the policy will pay out a cash lump sum to your family, so they’re able to maintain the standard of living they’re used to. But how do you start calculating how much insurance you will need?

What to consider when taking out life insurance

Consider all the outgoings your dependants would need help with if you were no longer able to pay for them. You can use a life insurance calculator (provided by Aviva Life & Pensions UK Limited) to help you out, but you might like to consider:

  • Housing costs – the type of cover required will vary depending on what type of mortgage you have, or how much your rent costs. Level term life insurance policies could suit people with interest-only mortgages, while decreasing term policies pay out in line with the remaining balance on a repayment mortgage, as the amount of cover reduces broadly in line with the amount owed. Other costs such as gas and electricity bills, council tax and other utilities will need to be considered too.
  • Childcare costs – it’s not just income you need to replace. If you weren’t around, would your partner have to pay for more childcare? How much cover is needed and for how long depends on how many children you have and their age.
  • Day-to-day costs – this includes outgoings such as running a car, the weekly food bill, school trips and school uniforms, as well as life’s luxuries like swimming lessons, trips to the cinema and holidays.
  • Any other costs – consider private school fees or the need to care for other relatives, for example , in addition to any other ongoing costs that will still need to be met if you’re gone.
  • Assets – these are the things that you own that could be used to provide money if you died, potentially reducing the amount of life cover you’d need. Take into account all your savings and investments, any existing life insurance (for example death in service), and your pension.

Consider how much you can realistically afford

You should also consider how much you can afford to pay each month, and how much your family would need to continue to meet their current costs. Premiums will vary depending on your circumstances, but for any individual, the larger your premiums, the more the policy will pay out if you were to pass away, so you should consider what a helpful sum would look like for your loved ones.

Understanding the different types of life insurance

Term life insurance policies cover you for a specified amount of time and pay out a lump sum if you die within that period. The most common types of cover are:

  • Level term – this means the amount paid out will remain the same.
  • Decreasing term – where the amount of cover reduces over time, usually in line with the amount owing on a repayment mortgage.

Critical illness

You have the option of arranging critical illness cover, which will provide financial protection for you as well as your family if you’re affected by a serious health condition or debilitating illness that is covered by the policy. This can cover heart attacks, strokes, dementia, cancer and a number of other critical illnesses, but it will vary from policy to policy.

The amount of life insurance coverage you get and how long you take it out for will depend entirely on your circumstances – there’s really no exact answer. Be sure to take all your family’s expenses into account, and really consider their ongoing needs. While critical illness cover helps you and your family, life insurance on the other hand benefits your family only, and any money left behind could really help after you're gone.