How much cover?

There is no easy way of working out the right amount of life insurance you need. You may come across set formulae – such as a lump sum of five or ten times your before-tax income – for working out how much cover you need.

These may make doing the sums simple but they do not take into account your personal circumstances, so you could end up insuring for too much or too little. The best way is to estimate what your dependants will need and for how long. Most online websites will include a life insurance calculator which shows you how to work out the amount you need to insure for, assuming that your main aim is the provision of income for your dependants and that you would want them to maintain the same standard of living as they enjoy now.
If you are married or live with a partner, you should each work through the calculator separately.

Before you can fill in the calculator, you need to make a list of:
· Lump sums that will be needed on or after your death
· Lump sums that your dependants will receive on your death
· Income that would be lost on your death
· Extra expenses that your dependants will have to meet after death
· Income gained after your death
· Outgoings that will be saved by your death.

Income that would be lost on your death

When calculating your income you should include both regular monthly income (multiplied by 12 to give a yearly amount) and any irregular income that your dependants would no longer receive after your death, such as:
· Your pay after all deductions
· Your pension (both state and other), if it will not provide for dependants
· State benefits
· Any maintenance payments you receive
· Monthly income from savings and investments
· Annual bonuses from your job
· Income from investments which would be used to pay for expenses on your death and which would not need to be replaced.

If you are a couple with children or you care for another relative, you should also enter lost income if the surviving partner would give up work to look after any dependants. If you keep your personal finances strictly separate from your partner’s, the amount of income lost will be the amount that the dead partner used to contribute to the running of the household.

Income gained and outgoings saved by your death

Include here any widow’s or widower’s pension that your partner would receive or dependants’ pension if you have children and any income that would be gained if your surviving partner increased his or her earnings.

The types of outgoings you should include here are:
· All or part of your mortgage payments – if the mortgage will be paid off on your death
· The amount by which your living expenses will be reduced – i.e. food bills, travelling expenses and so on – but bear in mind that the cost of heating and lighting your home is unlikely to fall dramatically
· Personal expenditure (e.g. spending on clothes and leisure activities)
· Payments into a personal pension
· Life insurance premiums