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Do you know how much life cover you need?
Thursday, 29 November, 2018
make sure you're
not underinsured
calculating your life cover is either easy or accurate
In the past we’ve talked about who should have life insurance and why they should have it.
Though something that we haven’t talked about is the key question that many of you ask!
And that’s how much life cover do you actually need?
So that’s what we’re going to talk about today…
When it comes to calculating your life insurance then there’s more than one way to skin a cat, as they say
One way of calculating how much cover you need is to use a multiple of your annual income
This ranges between 5 & 20 times.
The issue with this method is it’s a pretty broad definition of what you may need, a blunt instrument. Only a bit more accurate than a guess
You can be much more accurate when it comes to figuring it out and it isn’t that complicated or time consuming
We’ve broken the process down for you so that you can accurately calculate how much cover you need
So let’s get going.
But before we do, CLICK BELOW to receive our “Expat Life Insurance Email Series” with lots of bonus material including detailed guide on calculating your life insurance
Liabilities
These are the losses that we’re protecting our loved ones from.
It’s the things that will still need paying, if they no longer had your income
If your income was no longer available to your household what would be the impact?
Would they be able to maintain your home?
Are your kids going to have the same educational opportunities available to them? Or are significant compromises needed?
How would your partner fair financially? Are they going to manage comfortably or struggle to make ends meet?
So let’s take a look at what these liabilities are and how we should account for them.
how much life cover to clear your debts?
There’s no running away from these even when we’re gone, our debts are left behind…
They fall on the people that we leave behind
If we don’t provide for them then they can cause enormous stress for our family even financial ruin
Mortgages and loans need paying off lenders expect their money back. Repayments have to continue until the debt can be cleared completely. If this doesn’t happen then they’ll sell assets.
If there’s are any residual debt after that your family will still be expected to pay
So the first thing that you need to do is make sure that your outstanding debts are part of the calculation
If you have a mortgage then you should have life cover to clear the debt in the event of your death.
You may think that because the value of the property is greater than the outstanding mortgage…
That you don’t need it!
This isn’t true and it could leave your family in a big hole possibly even homeless
As we’ve already touched on the bank will expect your family to keep paying or clear the debt entirely
So how does the equity in the property help them do this?
Well it doesn’t, does it?
Now you may be thinking “They can always sell it”
That’s right they can…
Let me ask you this, what happens if this doesn’t happen quickly?
The answer to that is, it doesn’t. They can always sell it. Well they can, though that doesn’t always happen quickly.
Would they be able to afford to keep making the repayments?
If they could for how long exactly?
Life insurance eliminates all this…
It means that they have the money available straight away to clear these debts
One less worry for them to deal with
This goes for any debt that you may have
You get it, Right?
So, take the amount of outstanding debt that you have today and factor it into your calculation
Knowing that your family have what they need available to them so they don’t worry about paying debts
That’s got to be satisfying right?
Even if you’re single with no kids you’ll still need life cover to clear your debts
The debts going to fall on parents, brothers, sisters or any other family that you have
Though if you are single without kids you can stop reading right here
If you’re with someone and/or have kids then you should keep reading.
how much life cover to clear your debts?
If you have them there’s no need to tell you kids cost money and lots of it.
So I want you to imagine if your income is no longer available what would that mean for them?
As an expat there’s a strong possibility that your kids go to an international school.
It’s also likely that your company pays these school fees, so what happens if that stops?
Where would your family go?
Would they return back to your home country?
Do you still want them to go to a private school?
If you do, would your partner have the money available to send them there?
If the answers “No” then you’re going to need to factor this into your life insurance calculation
Maybe, it doesn’t even stop there!
Were you planning to provide financial support for them through college or university?
If you don’t know what the costs would be and need some help figuring out…
Then take a look at university fees calculator.
Even if you don’t plan to continue private education for your kids your partner still needs to raise them.
It’s estimated that when we include childcare the cost of raising a child is in the region of £230,000.
Obviously, all this depends on how old your kids are.
The younger you are the more you’ll need to factor into your equation.
Let’s be frank if you’re not around your partner is going to need childcare and lots of it. Even if both parents are working losing the income and support of one has a financial impact.
So, for each child and each year they have to 18 or 21 you’re looking at a cost of around £13,000 per year.
You get it, Right?
how much life cover for your partners income?
If only one partner is working then losing their income would be devastating.
If both are working then the financial impact will not be as hard though it’s still there.
How big the impact depends on the difference in the income levels between the parents
Whether you need to completely replace the lost income or not depends on how reliant you are upon it.
If your family is going to struggle without it then you need to replace it.
If only one partner is working and you lose that income…
What is the earning potential of the remaining parent.
Would you be able to completely replace the lost income or would there be a significant deficit?
Would the remaining partner go back to work at all?
It may not happen especially if there are young children to take care of.
Even if the partner does go back to work there’s going to be extra costs
In particular for the help and support they need to look after the kids.
So you need to determine how much annual income your family would need.
You also need to determine how long they’ll need it.
What we’ve done so far is make sure the family home is mortgage free. We’ve taken care of the kids education costs and expenses.
So what your family needs to live on has reduced.
The average family in the UK spends around £630 per week. This doesn’t include local taxes or mortgage repayments so as a guide this is a useful basis to work from.
There will be differences from one family to another, you’ll have to tweak it to suite you.
Also it could work out that in the first few years your family would need more money. For example if your kids are not in full time eduction.
This could mean the remaining parent can’t work or needs a lot of childcare.
After this their income needs could fall.
The next thing that we need to look at is how do you go about replacing this income.
Also how do you factor that back into your life insurance calculation.
OK, You’re ready to move on…
how much life cover to replace your income?
You have a few choices on how you go about replacing income via your calculation.
You can provide the necessary capital for the income in one chunk.
They can drawdown on this until there is no money left.
The problem here is what happens when the money runs out?
It may not be an issue if the kids have grown up and the surviving partner is working.
If that hasn’t happened then things could prove a little more difficult.
Another way of generating income is to provide capital then invest it.
The dividends and distributions the investments produce will be income for your family.
Let’s assume your family requires £30,000 per year and 4% per annum return is a conservative estimate. This means we would require capital of £750,000.
The benefit of this method is that there is always capital available.
The downside is that it requires more life cover so premiums will be slightly higher.
Once you’ve done this you’ve got the gross amount of cover that you’re going to need…
You’ve got that, Right?
Now let’s move onto the things that we can use to offset the amount of cover that we need…
But first why not, CLICK BELOW to receive our “Expat Life Insurance Email Series” with lots of bonus material including detailed guide on calculating your life insurance…
what have you got (Assets)
People have an obsession about being over insured though this is almost never the case.
In fact it is more often than not that the opposite is true. So we’re going to help you make sure this isn’t the case.
What we’ve done so far is make an assessment of your liabilities now we want to look at your assets.
So let’s start by looking at what we’re not going to include which is one thing, your family home.
This may not seem fair considering we’ve included the mortgage in our liabilities.
The issue is that your family home isn’t really an asset as such.
Shocking!!! I know…
Though this is because you’re family is going to live in it and it won’t produce income that they can use.
You may get capital growth though you’re not going to get your hands on that unless you sell it or take on more debt.
Including the mortgage in the liabilities calculation means…
You’ve secured your family a home.
Now, let’s move onto what you can include!
investment property
If you have other investment properties then you should put these in your asset column.
Make sure you include any debt relating to these assets in your liabilities figure.
These assets can and should produce income for your family.
Income is far more important than any capital gains that they make.
You can only release these capital gains by selling the asset you can’t profit take on a property easily.
pensions
You should factor your pensions into the assets that are available for your family.
Though you’ll need to be careful as not all pensions work the same when it comes to beneficiary access.
Any defined contribution schemes will pay the full value of the assets at that time as a lump sum.
The pension administrator will pay this money to your nominated beneficiaries.
Quick note is for anyone who finds financial terms baffling.
Defined contribution schemes are personal or company pensions that builds a pot of money. You can then use this money to provide an income when you retire.
A defined benefit scheme is a company pension for its employees. It builds a fraction of your final salary each year that you work for your company. This fraction is usually 1/60 or 1/80 which is building up for each year of service.
A defined benefits scheme passes benefits on in a different way after a members death.
There is usually a spouses income which is payable if the scheme member dies .
In most cases this would be half of the members income entitlement.
This is payable up until the death of the spouse.
If the member hasn’t yet retired when they pass away then there may be a lump-sum death benefit payable.
This would come in the form of a multiple of the members current entitlement.
Some schemes may also have a life insurance element which will pay out on the members death. You should also factor in any state pension schemes that you have an entitlement to.
Though a word of warning the full entitlement may not pass to your dependents. It may be a reduced amount or in some cases nothing at all.
Check and then factor that into your calculation.
If your pension pays a lump-sum then add this to your assets.
If on the other hand your spouse receives an ongoing income…
Then deduct this from your the income your family requires.
death in service benefit
Your company may provide life cover
This is payable to your nominated beneficiaries in the event of your death.
Should you include this into the assets section of your calculation?
Generally, we would advise against it.
The reason for this is that what you get can change and you have no influence on that decision.
Your company can change their benefits policy or you could move to another firm.
If the sum insured gets reduced then you need to replace it.
The likelihood is that you won’t or there’s a possibility that you can’t get more cover when you most need it.
This could occur if you’ve suffered from a serious illness for example
financial assets
So what assets should we be including in our calculation and what needs leaving out?
Let’s start with any liquid assets such as savings accounts or emergency funds. These need adding to the asset side of your calculation.
Forget about current accounts they fluctuate too much to be meaningful.
Include any investment accounts offshore or onshore into the assets list also.
Company stock purchase schemes will also need adding.
You can also add any life assurance policies to the list as well. These include any onshore endowments, offshore bonds or savings plans.
Make sure that there are no surrender charges applicable to these policies on death. Include the higher of either the value or the sum assured.
existing life insurance policies
If you’re looking to top up your existing life insurance. You should add the current value of your death benefits into your assets.
Obviously, if you’re replacing your existing policies the this doesn’t apply.
Remember as an expat it’s pretty certain that any life cover you took out back home won’t keep covering you.
So it’s important that you replace it. If you’re not sure then check with your insurance company first. The other option is to leave it out of your calculation
If the remaining term on the policy is significantly less than the time you need cover for. You may need to think about whether you include it or not
what next?
So now you’ve got a list of liabilities and a list of assets…
Total each one up separately. This is going to give you the total for the liabilities that your family are going to face.
You’ll also have the figure for the assets that they have to meet these liabilities.
Now you’re going to take away the value of the assets from the value of the liabilities
If the value of the liabilities is greater than the value of the assets then you need life insurance to that value.
If the value of the assets is greater than that of the liabilities then you don’t need to do anything
That’s because your family have more than they need
That’s Easy, Right?
summary
So let’s wrap this up,
This is how you calculate how much life cover you should have.
We’ve tried to make it as simple as possible though we accept that this is a relative concept. For some people financial calculations are more taxing than for others.
Also this is what we do so we may have failed miserably on the simplification bit of it.
If you don’t have the time or inclination to do the calculation for yourself, then don’t worry.
We’ve got good news!
Enter the information and it’ll work it all out for you.
You’ll still need to know about pensions and financial assets though that isn’t a bad thing to take stock.
Finally if there’s something that we haven’t dealt with that applies to you then get in touch. We’re more than happy to help.
Click Below to get our “Expat Life Insurance Email Series”
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