Things to consider with fixed-term insurance
You decide you need fixed term life insurance. You venture online to check out some prices. But after that, it all gets a bit confusing. There are so many numbers, with a worrying amount of commas and zeros in them. How do you know how much fixed term insurance you need?
The average cost of a 25-year, £200,000 life insurance policy in the UK is £29.72 per month 1. However, you might need more than that. On the other hand, you could save money by shortening your term. But, is a cheaper policy worth the gamble?
Factors that affect the amount of coverage you need
The primary reason why people take out life insurance is to provide financial security for their loved ones when they die. It’s not something anyone likes to think about, but it happens.
The easiest way to work out how much insurance you need is by calculating your current outgoings. Which costs will your loved ones still have to cover if you died? How would they be able to do it?
There are currently 11.1 million outstanding mortgages in the UK 2. For most people, their mortgage is their single biggest outgoing.
The average age people in the UK finish paying their mortgage is 69 2.
If you are the only name on your mortgage document and you die before finishing paying it off, your mortgage provider can take control of your property. They may choose to repossess your property and sell it to recoup their money.
If you have a joint mortgage with your partner and you die, your partner may have to cover the whole of the mortgage on their own. Neither of these outcomes are ideal. Try to avoid them.
When considering a fixed term life insurance policy, think about how much you will need to cover your mortgage if you died. This should be the absolute minimum amount of cover you need.
With fixed term life insurance, the lump sum your loved ones receive doesn’t change over time. So, if you died midway through the term without paying off your mortgage, the payout will be enough to pay it off, with a surplus on top.
If you have other debts in your household, such as bank loans, it is a good idea to make sure your life insurance cover these amounts too.
Of course, your mortgage isn’t your only outgoing. There are the essential costs of running a household, such as utility bills, food and transport.
The average household in the UK costs £14,945 to run 3.
How do you pay these costs in your household? Are you the sole income earner? Do you have a partner that contributes? If so, how do you split the payments? What proportion do you pay?
These are important questions to answer when calculating how much fixed term life insurance you need. If you died, which outgoings would your loved ones still have to cover. You wouldn’t need to buy a travelcard, but you would still need to pay the electricity bill in your family home!
Your life insurance is there to take care of your loved ones after your death, make you’re your life insurance payout will cover these costs. Even if your partner has a stable income, do not burden them with extra outgoings at an already stressful time.
Size of family
When thinking about how much fixed term life insurance cover you need, it’s essential to think about your descendants.
How many children do you have? How old are they?
If you have young children, remember that young children grow into bigger children. They will be a dependent part of your family for many years to come. The amount of money it takes to support them will change as they grow older. Make sure you take this into account.
Think of the life you want for your children. Will they go to private school? Will they go to university? You may be fine to pay for these things at the moment, but if you died, who will pay for them?
If you want your children to have this level of education even in the event of your death, you need to make sure your life insurance provides for it.
On the other hand, if your children are older and will be flying the nest soon, you may feel you don’t need to support them after your death.
Only pay what you can afford
Once you have worked out the outgoings that still exist after your death, you can get a better handle on the amount of fixed term life insurance you need.
However, make sure you can afford the monthly premium on your life insurance. You don’t want to put yourself in financial trouble when you are alive, just to make it better when you’re dead!
Subscribe to Sherpa to find out more about fixed term life insurance.
1 – Atoo, Bob. “How Much Does Life Insurance Cost? The Average Cost of Life Insurance in the UK.” Bobatoo.co.uk, Bobatoo, 28 Jan. 2019, bobatoo.co.uk/blog/how-much-does-life-insurance-cost-the-average-cost-of-life-insurance-in-the-uk/.