Life Insurance Services - Levels of Life Insurance Cover

You can only take out insurance on someone's life only if you have an 'insurable interest' - in other words, you would suffer a financial loss if that person died.

- Your own life
- The life of your husband or wife (but not an unmarried partner)

So you can take out any amount of insurance if the life policy is to pay out on the death of yourself or your husband or wife. But what amount would be sensible?

If you live with an unmarried partner, you can still take out insurance on their life but the amount should be in line with the financial loss you would suffer. The way round this, if you want more cover, is for your partner to take out insurance on their own life to benefit you - the amount can then be unlimited. But, again, what amount would be sensible?

Work out how the household budget for your survivors would change if you were to die. Couples should each do this. Bear in mind that even the death of a non-working partner would cause financial problems if you had to pay for childcare, hire a housekeeper, gardener, and so on.

Some life insurance (called 'family income benefit' or 'family income cover') does pay out a regular income for a set period. But you might prefer a policy which pays out a lump sum that could be invested to provide income. You can use the table below as a guide to converting income into a lump sum.

The table shows the lump sum you would need
to invest to provide £1,000 of income a year.

		Example calculation
Step 1	Work out how much extra income you need and divide that figure by 1000	£23,000 a year needed. Divided by 1000 = 23.3
Step 2	Decide for how many years you need that income (for example until your children reach 18).	Income needed for 9 years.
Step 3	Choose the rate at which you think the invested lump sum might grow.	Estimate that the invested lump sum might grow at 6% a year.
Step 4	Note the figure that appears under the investment growth column opposite the number of years you need income for.	For 9 years at 6% the table gives a figure of £7210.
Step 5	Multiply the figure from step 1 by the figure in the table that you got in step 4.	£7210 multiplied by 23.3 = £167,993

	Assuming the invested lump sum grows by 6% a year:		Assuming the invested lump sum grows by 6% a year
by year 5	£4,465	by year 5
by year 7	£5,917	by year 7
by year 9	£7,210	by year 9	£7,210
by year 11	£8,360	If you want the income to increase each year to protect against inflation, you need a larger lump sum.
by year 13	£9,384
by year 15	£10,295
by year 17	£11,106	By the end of the time period, the lump sum will have been used up.
by year 19	£11,828
by year 21	£12,470

Example of working out how much cover you need

Paul works out his family's budget would be affected if he died. His calculations are shown in the table below.

	Paul's estimates
Income the family would lose His earnings	£30,000
Deduct Income they would gain from his pension scheme at work	£ 3,000
Deduct Income they would save feeding him, his work related costs, etc.	£ 4,500
Add Extra Expenses they would pay Home maintenance	£ 800
EXTRA INCOME NEEDED	£ 23,300

Paul's youngest child is now 12 and will probably go to university. Paul would like cover to last until he reaches 21 - in other words nine years.

The previous table shows that to provide £1,000 for nine years, assuming investments grow by 6% a year, Paul would need a lump sum of £7,210. Therefore, to provide £23,300 a year, he would need £23,300 / 1,000 x £7,210 = £167,993.

He already has some life insurance through work that would pay out three times his earnings - which comes to 3 x £30,000 = £90,000.

In total, he needs lump sum life cover of £167,993 - £90,000 = £77,993, which he rounds to £80,000.