That seems to be one of the most asked questions you got back when you sold insurance (not less important is personal loan bad credit), and it seems to be the one question that is still the most asked when life insurance is discussed.
With other types of insurance, it can be clearly defined as the extent or amount of coverage you require or need from the policy or for the system to cover. Car insurance is a good example, you are required to carry this to drive, and there are minimum limits of coverage you are required to have. The guesswork has been taken out of this for you.
But life insurance is a whole different animal. No clear cut lines are stating you need to have this much insurance for this or for that.
Many years ago some insurers had you sit down with an agent or broker, and they would go through a complicated and complex financial needs analysis to get the exact figure of how much life insurance you require. This analysis took into account if you were single, had children, was buying a property, your annual income, if your partner worked, what assets or investments you had, and also what your goals in life were. This was a lengthy process and could take over an hour, or in some instances hours, as the person looking to get insured to think carefully about their answers as they had not given much thought to some of what was being asked of them.
This was too complicated and could put someone off even buying life insurance; so we simplified the process.
We would ask the person looking to get life insurance what is it you are looking to protect and what is it you want the insurance proceeds to do once you are gone?
In many instances the answers were the same: “I want my mortgage to be paid off”, “I want my children to go to university”, or “I want all my debts/bills and funeral to be paid for and not burden my family”.
From there, that starting point and goal the person had for the insurance to complete for them. We would look at amounts required to meet that goal.
If a person’s purpose for having life insurance were to pay off their mortgage, we would look at the current balance of the lease as a beginning figure for a life insurance policy. But to this, we might have to add an increased amount to cover the operating expenses (gas, electric, water rates) and maintenance of the property for some time. Especially if the insured’s partner is not working and there are children involved. There may need to be a bit of a buffer or a few quid left to help with these expenses.
If the insured’s goal is to have his child or children go to university, we would need to look at the cost of university and then also project years ahead as they child may not be attending schools for many years later as they grew up. The cost of attending a university can increase in a few years.
Of course, there is no exact way to get these figures accurate to the penny, but you get an idea of the amount of insurance coverage is needed.
So why doesn’t everyone take out a million £ policy and then they would be adequately covered. It just isn’t that simple.
You do need to qualify for the amount of insurance you are looking to take out. So a person earning £25K a year cannot just say she wants a £1, 000, 000 life insurance policy and get it issued. They would have to show a need for this high amount of coverage.
The same can be said someone was earning £100, 000 a year and only requesting £10K of life insurance. They may qualify for the policy, but if this were their only life insurance policy, they would be grossly underinsured. There is a balance that must be found based on a few facts and factors.
So in asking yourself the question, how much life insurance you need, you should consider what it is you want the insurance to protect or provide once you are no longer here. But you also must have the financials to back up that answer.
If you are the sole provider for your family and need to ensure they care for an extended period, this also will increase the amount of insurance you require.
Many factors to consider, but it doesn’t need to be too complicated or involved to answer the posed question of how much life insurance do you need…