Life How much life assurance is advisable?

[Legion2008]

Ok, I'm currently looking into my existing level of cover for both myself and my wife. We've 2 kids.

We've currently got a life assurance/serious illness/mortgage protection policy on a level term. My intention is to separate life/illness protection from the mortgage protection and put the mortgage protection on a decreasing value policy.

So my question is what multiple of salary should I be looking at for the life assurance and serious illness policies for both myself and my wife? I have a death in service payment in my current place of work, however there's no guarantee that I will remain working there over the long term.

 

[LDFerguson]

It's good to see you looking at this in a methodical way. Too many times I see people buying round sum amounts of life cover with little or no method behind it.

My method of calculating this would be along the following lines: -

• Take net income for both yourself and your wife (if applicable).
• Deduct monthly mortgage repayment (which will be covered by Decreasing Term policy.)
• Remaining amount is monthly sum to be replaced in the event of death.
• Calculate how far existing life cover, Death in Service cover, investments, pension funds etc. will go towards replacing this income.
• Factor in the State Widow(er)'s Pension.

Amount that remains is the income that needs to be replaced in the event of death. It is possible to have a life insurance policy that pays a monthly income, while others pay a lump sum.

If your wife is a stay-at-home mum, I'd substitute cost of childcare for her income.

Liam D. Ferguson

 

[Legion2008]

Thanks for the response, it's along the lines of what I was thinking about, though for me the question is a bit around should I discount the death in service payment as that's not likely to be a long term and then the cost of a life assurance policy for myself in 4/5 years time would be considerably higher than what I'll get quoted now ....

 

[LDFerguson]

Thanks for the response, it's along the lines of what I was thinking about, though for me the question is a bit around should I discount the death in service payment as that's not likely to be a long term and then the cost of a life assurance policy for myself in 4/5 years time would be considerably higher than what I'll get quoted now ....

In general, I'd say that you should discount it and reduce your private life cover to take account of it. Your point about additional life cover being dearer when you're 4/5 years older is certainly valid, but the increase is unlikely to be that large as to make it worth while paying 4/5 years' premiums in the meantime for cover you don't need.

That's a very general observation which might be argued against depending on your specific circumstances. The younger you are, the more true it's likely to be. The rate of increase in cost of life cover accelerates as you get older. In other words, the difference between cost of cover between the ages of, say 25 and 29 is far less than the difference in cost between age 51 and 55.