Life Insurance and how much is enough?

Short answer would be; it largely depends on your investments and how much life insurance you’ve bought. Figuring out how much life insurance you need can be difficult, and the appropriate amount varies by situation: marital status, number of dependents, earning potential of each spouse and whether both work.

Many financial advisers, nonetheless, maintain that correct coverage is crucial to a successful financial plan. Overinsure, and good money is wasted on the unlikely event of a premature death. Underinsure, and a family may have to lower its lifestyle at an already traumatic time, a newly single stay-at-home parent might have to return to work, a house might have to be sold in a bad market or children attending college might have to drop out.

Insurance aggregators offer calculators to figure life insurance needs as do insurance companies, banks and investment companies. The goal is for people to withdraw less annually than their investment portfolio returns. This allows for inflation if the money is to support them for long periods. Many advisers recommend an annual withdrawal of 5 percent or less, which would be £50,000 in annual taxable income on £1 million.

There are two basic varieties of life insurance. Term insurance, which covers a set period of time, is cheaper. Permanent insurance, which includes whole life and universal life, does not expire and is often used by wealthier individuals to pay estate taxes.

Young people in excellent health should not automatically buy extra life insurance through their employers, specialists say, because it can be more expensive than what they could obtain on their own unless they get it at a group discount rate. Conversely, older people, those in poor health or those looking for a convenient way to buy life insurance could benefit from employer plans.

Many insurance advisers recommend term insurance over permanent. Term insurance costs a fraction of permanent insurance like whole life (with a locked-in premium) or universal life (where the premium may vary based on projected interest rates). Term rates tend to be constant for the life of the policy - 5 to 30 years - but coverage is like a lease: it expires when the policy does. When their term insurance expires, people who are in ill health or are otherwise considered a bad risk may finds themselves uninsurable or facing prohibitively higher premiums.

One compromise is converting term insurance to a permanent policy at preset points, allowing coverage to continue but at higher rates. Permanent insurance should not expire and it sometimes is used as a savings tool because it accumulates cash value. If policies are surrendered within a short period of time, however, policyholders may receive little of their investment.

Life Insurance is something that you don’t ever want to have to use, but it’s really not about you. It’s for those people who are going to be there if something happens to you.