How much life cover is needed?

Why is it that they have too much cover?

Because the level of cover they have in place is based on nothing more than guesswork. When taking out life cover, most people take a multiple of salary, say 5 times. Then it needs to be protected against inflation, so it is indexed linked, which means it gets more expensive year on year (under some policies the premium increases by a whopping 8% each year!). For a 40 year old earning €80,000 a year, with initial cover of €400,000 increasing at 3% per annum would have cover of €837,500 in 25 years time. Now, remember that a lifetime pensions and savings have been accumulated at this stage and their kids should be financial independent at this stage, so do you need that much cover at that age? I would argue you don’t.

In calculating the amount of life cover a family needs, I look at two aspects; immediate lump sum needs and regular income needs. Both the lump sum and regular income needs will differ for each spouse, especially if one of them works in the home.

Lump sum needs

When calculating the lump sum needs, you need to take the following into consideration:

1. Funeral costs
2. Pay off short term debts e.g. car loans
3. Some cash for the current account
4. If one spouse will need to take extended leave from work, salary replacement will also be needed.

Regular income needs

When calculating the regular income needs, you need to take the following into consideration:

1. The mortgage will be paid off.
2. You will receive the Widow’s pension of €10,062 plus a supplement of €1,550 for each child.
3. The need of additional child care costs.
4. How much is needed to run the household.
5. How much is needed to fund your lifestyle.

By being more precise over your actually needs instead of just picking a big number, you can save yourself thousands over the life of the policy. So go have a look at your life cover policy, see how much you are cover for and try to figure out how you came to that amount. Let me know how you get on.