The majority of people who need life insurance are parents of children who still require financial support. I mean both parents usually need it, because they both carry out a support role that would cost money to replace. If your partner earns an income, that income will need replacing, should the worst happen. If your partner doesn’t earn an income but looks after the children full-time, you’ll probably still want to insure your partner, because it’s not cheap to hire a full-time nanny.
And it’s not just children. It may be that you support others financially, such as a sibling or a parent. Similarly, your partner might partially or wholly rely on your income. Those people will need protecting. It’s just a case of thinking who will be affected.
You can reverse that question, too: ‘Do I depend on anyone else?’ If the answer is ‘Yes’ and that person doesn’t have life insurance to help you, you can take out life insurance on that person’s life.
How much do you need?
I’ve heard of many rough guidelines to the amount of insurance you need. Some say that your life is worth about ten times your annual income if you’re the sole breadwinner. Others say that you’re worth €20,000-€25,000 per year if you look after the children full-time. However, we’re all different, as are our requirements.
If your partner has an income, you might not require so much insurance, for example. Do a few calculations based on what your dependants will need if you die tomorrow, including not just monthly house bills but also such things as future university costs for the children and pension contributions for your partner. Then work out how long you need this for. (We have handy and easy to use calculators on www.sefs.ie if you need help)
The payout is tax-free, but you may want some extra cover to pay off debts, because debts are paid from your estate before your benefactors get what’s left.
Even after you have bought life insurance, you will need to re-consider the total amount of cover as circumstances change. You may need to increase the insurance if you get a bigger home or have more children, or if higher inflation devalues your insurance. On the other hand, as your children get older and the mortgage shrinks, your family will need less financial support and for a shorter period of time, so you could reduce the cover.
How long to insure yourself for?
This should be relatively easy to decide. You need to be covered for as long as people will be depending on you. This could be to age 18, 21 or 23 years for children or, if you support your partner, it could be till you are due to retire. If you’re covering your mortgage, you need to take out life insurance for the full mortgage term.
This article aims to give information, not advice. Always do your own research and/or seek out advice from a Financial Broker before acting on anything contained in this article.