Calculating your requirements for a life insurance can sometimes be very tricky. The purpose of life insurance is to ensure that the families income doesn’t suffer from the death of a loved one or the loss of a breadwinner. Here is a list of the top 10 things you should take into consideration when purchasing life insurance.
- You need to make an assumption about the return you will get on investments. The FSA has clear guidelines around the investment returns it expects the average investor to make from a lump sum investment. Use the average figure that the FSA shows in life insurance projections if you are buying an investment linked policy.
- Deduct from the required income the amount of money that the deceased would have spent on themselves. This ensures that you do not over insure yourself and keeps the annual or monthly premium costs at a minimum.
- Make a calculation about any death in service benefits you will receive from an employer. In many cases, these can be four-times salary and can be used to offset the lump sum requirement for life insurance.
- If you have a young family, consider protecting the life insured for the duration of the children’s dependence. This often coincides with the ability of the surviving spouse to draw widows benefits from a company or state pension policy.
- Take into consideration any mortgage which is paid off on death of a life insured. Again, this will help to reduce the capital requirement for a lump sum.
- Make sure that any non-breadwinning spouse is also insured to help replace the cost of domestic duties such as cooking and cleaning if it is impractical for the surviving spouse to carry out the duties due to work obligations.
- If you only need money for a specific length of time, consider an income-based life policy. This will provide you with a set amount of income for a specific number of years should the worst happen.
- Don’t forget to consider the pension needs of the surviving spouse should the worst happen. Many families have covered themselves by providing adequately for the children only to see the pot run dry when the surviving spouse reaches retirement. In this scenario, the surviving spouse is forced to rely on state benefits and experiences a fast and drastic drop in income.
- If you are building up a lump sum in an investment account within a life insurance product, understand and are better ways to do it. You should first consider tax-free policies and pension plans before you pay investment premiums to a life assurance company.
- If your estate warrants it, don’t forget to write the policy into a trust. This will protect the proceeds from the taxman and ensure that your family gets the maximum benefit from any payout.
Always seek advice from an independent financial adviser before you make any decisions about your life insurance.
