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Should I have life cover and if so what size should the cover be?

By: Chris Clare

As a financial advisor I find that I am often asked that very question but it has to be said that it is generally quite easy to answer.

The first question that you need to ask yourself in order to answer the above is "If I die will I leave someone worse off financially?"

In the question "will anyone" that refers to not only family dependents but can also mean lenders or business partners, just about anyone really. So in other words if you die and someone needs money as a result, you will need to sort out some sort of insurance.

On that basis and before we look at personal protection for family dependents, let us look at one of the most used of the life insurance contracts and that is Mortgage Insurance.

When you take out a loan on a property such as a mortgage the lender invariably wants you to insure the debt in the event that you die. So if you have a debt of say 120k for 25 years, the insurance that you would arrange based on the questions above would be term insurance for 25 years with a sum assured of 120k therefore ensuring that if you died, during the 25 year term of the debt, there would be a lump sum sufficient to repay the lender in full.

Moving onto protecting your family dependents, again in the question above they can be considered the individuals who would be deemed financially worse off in the event of your death. It should be said that you would also want them protected because you work to provide a certain lifestyle for them and you surely would want that lifestyle to continue even if you were not around to maintain it.

Family protection is a little harder to quantify in so much as how much do you take out in life insurance? Let's say that you are the breadwinner in a household and your income is 20k per annum. If you can get hold of a type of insurance that pays out an annual sum such as the type we have in the United Kingdom called family income benefit then all you need to do is take that out for 20k pa and that is sorted. If this is not the case then you will need to take out a lump sum type insurance policy generally known as lump sum term assurance.

How much money would you need from a lump sum plan in order to produce a lump sum of 20k per annum? This is very subjective and does depend on market conditions. It is also effected by were exactly you intend to invest the money in order to produce the returns. That said it would not be considered unusual to times the need by ten and use that figure for the ultimate value ie 20k per annum times ten transfers into a 200k lump sum. Invested this would hopefully be able to produced the desired 20k well into the future.

So in summary, the need for life insurance is defined by the answer yes someone will be worse off in the event of my death and the amount necessary is defined by establishing the amount either needed to repay liabilities or the amount lost in the event of the death.

Article Source: http://www.article-voip.com

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