How much life insurance is enough

GPark

Can someone please advise how much life insurance we need.

Our house is worth approx 160k, with 96k mortgage outstanding, when we took out the mortgage, we also took out decreasing life insurance, to cover the mortgage, it costs £40 per month. We were happy this was all we needed because if one of us died the other could afford to stay in the house on one salary if there was no mortgage.

However, in December, we had a little boy, so now I am not sure if we have enough insurance, we both have pension providers that pay fairly decent death in service grants, mine would be £80k, DPs would be £70k.

Is this enough or should we get another life insurance policy? and if so, how much do we need the second policy to be for?

dunstonh

Your current life policy is enough to clear your mortgage so that particular need is met. However, you also have family protection needs so you need a second policy to meet that need.

The death in service amounts are handy but not really enough (i.e. @ 5% income the £80k DIS only pays £4000 a year. That isnt going to go far with the loss of one income and childcare costs needed on top of.

You need to do a shortfall analysis to identify how much each you would be worse off in the event of each others death. Then you either need to take out a family income benefit to meet that income need or a level term assurance. If the latter, its a good idea to use 5% income as a guide. i.e. £100k of cover = £5000 p.a. income. So, if you think you need £10k of income then either take out a family income benefit for £10k p.a. or a level term assurance of £200,000.

GPark

Thanks for your help, hope you don't mind a follow up question....

I'm the higher earner, and I bring home £1560 per month, but the mortgage is £560 per month, so if we kept the current policy, the shortfall would be £1k per month, childcare costs wouldn't change as I will be going back to work fulltime after my maternity leave. So at 5% we would need an additional 160k of cover.

Would it be better to take out a second policy for £160k or cancel our existing policy and take out a new one for the total amount of £256k?

Our existing policy costs £40 per month for decreasing cover, when it was taken out I was 29 and DP was 30, I am now 32 and DP is 33, will the cover be more expensive because we are older now?

dunstonh

You have two different needs. One is mortgage protection and one is family protection. The time requirements and amounts will be different for both so treat them individually. Indeed, if your salaries are inbalanced then often three policies are required (and can be cheaper) than trying it with one or two policies. i.e. you may need more protection on your life due to higher income so you have one policy at the higher amount whereas spouse/partner may need a lower amount.

As you get older you get more expensive to insure. Critical illness cover and PHI in particular start to jump up in price in your 30s but life assurance doesnt jump as quite as much until late 30s.

Grooveisintheheart

Hi Gpark, was struck by your post because the figures you gave are almost identical to ours (property worth approx £170k and £97k to clear on our mortgage). In the last fortnight I've arranged a new life assurance policy for us (having discovered we'd accidentally managed to cancel the old one!!!) and for premiums of £24 per month we are getting joint decreasing cover for the mortgage plus two single level term policies worth £80k each. That was for two 35 year olds, one a non smoker and the other trying to kick Nicorette patches. I would have liked to get more cover, and I'm sure this is much less than ideal, but I was led by the budget for our premiums. The cover has been arranged with Royal Liver through https://www.lifeassureonline.co.uk (we are still to pay our first premium but been pleased with the service so far).

dunstonh

The cover has been arranged with Royal Liver through www.lifeassureonline.co.uk (we are still to pay our first premium but been pleased with the service so far).

Royal Liver have awful service standards at the moment and have a 3 week backlog on any applications not accepted straight away on their online system.

If you have anything to declare healthwise then its probably best avoiding Royal Liver at the moment unless you are happy to wait a long time.

Grooveisintheheart

We have received plan documentation quite quickly, and I did have a health issue to disclose which they accepted without the need to refer to my GP. But sounds like they are variable from what you say and its useful to have the heads up for future problems.

GPark

Thanks for explaining, dunstonh, I knew it would get more expensive at some point but wasn't really sure when.

I have been rethinking my shortfall, I originally calculated it based on my entire salary, but my personal spending is around £300 per month, plus I usually save around £250 per month.

I am therefore going to consider the shortfall to be £700 per month, not £1k,which would be my salary minus the mortgage costs and my personal spending, my partners shortfall would also be similar, so I am going to look for a joint policy for £100k.

I am assuming that a joint policy that pays out on the first death would be cheaper than two seperate policy.

bigbloke45

"I am assuming that a joint policy that pays out on the first death would be cheaper than two seperate policys."

Maybe! But two separate policies should not really cost more than a joint life first death policy apart from the fact there would be two policy fees instead of one (about at most a few pounds per month)because insurers add the cost of each life assured together and then apply one policy fee rather than two.

For that you get the opportunity that your insurance policies would pay out double if, God forbid, you both died together.

Also, I would always suggest that you effect the policies on the basis of "life of another".

This means that each of you insure the other person and you pay the premium. i.e. the wife owns the policy, but the husband is the life assured. The wife pays the premium so, whatever happens in the future, as long as the policy is maintained, the sum assured will be paid out. For the husband, the same applies.

In this way, even if one partner decides to go their own way and wants nothing more to do with the children etc. then, on their death, as long as premiums have been maintained, the sum assured will be payable because there was a valid "insurable interest" at the outset.

Please always remember that financial planning should always be about the future and not be concerned with today's emotional involvements. I know this sounds harsh but, believe me, do it right today and tomorrow will thank you.

But most of all, I hope that everything works out OK for you. For most people it does. Just remember the old quote "Trust in God, but keep your powder dry"

Best wishes.

But I'm sure that dunstonh will have his own view on what I've just said!