Life Insurance Needs Calculator

Life insurance provides a tax-free lump sum to your dependants if you die during the policy term. The amount of cover you need typically includes your outstanding mortgage, other debts, income replacement for a set number of years and any specific costs such as children's education. A common rule of thumb is 10 times your annual salary, but individual circumstances vary, and UK term policies are more often written at 5 to 7 times salary.

A more careful calculation starts from what actually has to be paid for. Take the outstanding mortgage, add the years until your dependants can support themselves multiplied by annual living costs, add funeral costs, which average £4,000 to £8,000 in the UK, then subtract existing savings and investments. A £200k mortgage, 15 years at £30k of living costs and a £5k funeral, less £20k of savings, points to £635k of cover. On a £50k salary the rule of thumb would have suggested £250k to £350k, which shows how much the detail changes the answer.

UK life insurance comes in two main forms: level term, which pays a fixed amount throughout the term, and decreasing term, where the payout falls over time to match a repayment mortgage. Level term is more expensive but provides consistent cover, while decreasing term is the cheapest option at 30 to 50% less. Index-linked policies lift the payout with inflation over a long term. Whole-of-life policies pay out whenever you die but cost significantly more and are mainly used for inheritance tax planning. Family income benefit pays a monthly income instead of a lump sum until the end of the term, which suits income replacement.

Premiums depend on your age, health, smoker status, occupation and the amount and length of cover. A healthy 35-year-old non-smoker pays £8 to £15 a month for £250k of level term over 25 years, or £15 to £25 a month once £100k of serious illness cover is added. Smoking pushes the premium up by 80 to 150%. Past the age of 50, prices climb by 15 to 25% for every year of age, which is the strongest argument for buying sooner rather than later. MoneySupermarket and Compare the Market will quote, and a broker such as LifeSearch costs the same as going direct, since commission is built into the price either way.

Writing a policy in trust keeps the payout outside your estate for inheritance tax purposes and speeds up payment to beneficiaries. Money that passes through the estate waits for probate, typically 6 to 12 weeks, whereas a policy in trust pays out without that delay and is protected from creditors. Most UK insurers supply trust documents free of charge. A discretionary trust is the most flexible and an absolute trust the simplest, and setting one up at the start of the policy is far easier than adding it later. A solicitor charges £150 to £300 where the arrangement is complicated.

A handful of mistakes account for most of the trouble. Buying late costs money, because premiums climb with age and with any change in health. Failing to declare a health condition can invalidate the policy, since the insurer may decline the claim even where the omission had nothing to do with the cause of death. Leaning on an employer's death in service benefit, usually 3 to 4 times salary, leaves you uncovered the day you change jobs. Skipping the trust sends the money through your estate. Cancelling an old policy before the new one is in force risks a gap you cannot close if your health has changed. Review the whole arrangement every 5 years or after any major life event.

Critical illness cover pays a lump sum on diagnosis of a specified condition such as cancer, heart attack, stroke or MS. One in two people in the UK develop cancer at some point, private treatment typically costs £30,000 to £50,000, and 6 to 12 months away from work is common. Combined life and critical illness policies pay on the first event, whether that is death or diagnosis, while standalone cover costs more but can pay on both. Critical illness runs 3 to 5 times the price of life cover alone. It earns its place if you have dependants, no income protection and no savings covering 3 to 6 months of income.