Life cover: how much is enough?
Life cover is bought once and rarely revisited, so it is worth getting the number roughly right. This is the sum we walk through with clients.
The four-line sum
- Debts to clear. The mortgage balance, plus any loans you would not want to leave behind.
- Income to replace. Take the household income the family would lose and multiply by the number of years until the youngest child is independent. Ten years is a common figure.
- One-off costs. Funeral, a period of no work for the surviving partner, perhaps a car.
- Less what exists already. Death-in-service from an employer, savings, and any existing policies.
Add the first three, subtract the fourth. For a family with a $260,000 mortgage, $45,000 a year to replace over ten years and $20,000 of one-off costs, with $90,000 of death-in-service, the figure is $640,000. That sounds large; at 35, healthy and non-smoking, twenty-year term cover at that level costs in the region of $25 a month.
Term or whole of life?
Term cover pays out if you die within a set period, and costs a fraction of the alternative. It suits the mortgage-and-children years, which is when most people need it. Whole of life always pays out eventually and is priced accordingly; it has a place in estate planning, and not many others.
Decreasing or level?
If the cover is there to clear a repayment mortgage, a decreasing policy that shrinks with the balance is cheaper. If it is there to replace income, keep it level.
The recommendation we send after a first meeting sets out the sum, the term and the type, priced across our panel. It is written to be read in ten minutes and it is not a sales pitch.
