It can be hard to come up with a specific number, because each situation is different. If you have debts, think about what you would want to happen if you a) die and b) can’t work. If you die, and presuming you would want the debts paid off, your starting point for life insurance needs to be the amount of debt outstanding.
If you can’t work, you’ve either had a nasty diagnosis and so critical illness cover could pay out to pay off the debt completely, or provide a buffer of a lump sum so you could pay the debt for a few years, just to give you time to recover.
Or, if it isn’t a serious diagnosis, then it’s an income protection scenario, and so the regular income would continue to help you make the payments on your mortgage. The debt wouldn’t be paid off, but you could still service the debt.
What to Think About
Let’s say, on a cheery note, you have a nasty car accident which leaves you disabled, but fully in control of your faculties. This may mean you can’t work ever again. In that scenario, what would it mean to you to have a guaranteed, rising level of income being paid to you every year or month from an income protection policy?
Can you imagine the difference that would make compared to suddenly going to zero income except for state benefits? You get the idea. Providing for dependents is hard to put a number on.
You could consider either replacing your income with a family income benefit policy – that would be ideal. This would pay out a tax-free income from the date of your death until the end of the term of the policy.
You could also decide to add a lump sum benefit life insurance policy, to provide a cash buffer on top of that, which is used to pay off the debt. Being debt-free and with £100,000 in the bank and a tax-free income, would be a good position to leave your partner in.
If you have kids, think about what the loss of your provision would mean for them, and about how insurance could bridge the gap. A lump sum which could set them up for adult life would be a good idea.
Think about the level of provision you want to make. For instant, you might provide a family income benefit that pays for the kids to be brought up, but maybe you could consider a lump sum as well. That could help them get on the housing ladder, to buy their first car or go through university without a mountain of debt.
Remember, the point is to provide for those left behind, not to make them rich, so don’t bankrupt yourself to provide insurance that, God-willing, you’ll never need to use. However, knowing it’s there will provide insane amounts of peace of mind.
Make sure you understand your work benefits, as this is really important. If your employer provides 4x your salary as a lump sum if you die, then factor this in when choosing insurance. Remember that if you change jobs these benefits will go away and your new employer may not offer similar benefits.