How Much Should I Be Paying For Life Insurance?

The cost of life insurance varies so much, it can be difficult to work out a good deal from a bad one. That’s why we make the case to go via a comparison site as you’ll be able to make a better judgement.

For 20-year level term insurance, you can pay as little as £5 per month if you’re under 30 (that’s with as much as £100,000 of cover). However, if you want whole of life insurance, you’re looking at least £60 per month for £100,000 of cover.

So, why is there so much disparity in prices? And how much should you be paying for cover?

What type of policy is right for you?

Before we can answer those two questions, you need to be clear on the type of coverage that is right for you.

Let’s have a quick recap on the three main types of policies:

1. Whole of life – as it suggests on the tin, you’re covered for the rest of your days. Premiums are high but they’re fixed for life – as is the pay-out which can be exempt from inheritance tax if it is written into a trust.
2. Level term – you’re protecting yourself for a fixed term, which could be as short as five years or as long as 40 years. The length of protection depends on your age and your health, with the pay-out also reflective of this (i.e., generally, the longer the term, the bigger the lump sum).
3. Decreasing term – a tapered pay-out is a cost-effective way of covering a repayment mortgage where the outstanding debt reduces over time. The cover is put in place to ensure that in the event of your death, your beneficiaries would receive enough to pay off the mortgage.

If you want to dive deeper into the differences between the three and which one is best suited to your budget, circumstances and risk mindset, check out this previous article.

If you’re driven primarily by price, the cheapest, easy way to protect your family is level term life insurance.

Unless you make changes to your policy, your premiums will stay the same. So, if you’re covered at £5 per month for 20 years, you’re only paying £1,200 for two decades’ worth of cover. In comparison, for the same period, whole of life cover could cost you more than ten times as much.

Decreasing term insurance premiums are often even cheaper still as the pay-out decreases over the length of the policy.

How much cover do you need?

Life insurance is put in place to cover the lack of income if you’re gone. But putting a figure on that isn’t easy.

Some people take out cover based on the main breadwinner’s income, whilst others aim for a lump sum that’s enough to repay any outstanding debt.

As you weigh up your level of cover, consider the following:

• Your mortgage

  If the primary reason for taking out insurance is to protect your mortgage, you might want to align your policy with the outstanding debt. This helps guard against you from over-insuring yourself i.e., taking out more cover that you actually need.

  If you have an interest-only mortgage, it’s important that you keep inflation and fluctuating interest rates in mind when calculating how much cover you need. It might not be as simple as matching your pay-out to the outstanding debt, which could rise over the years.

• Other loans and debt

  If you have any outstanding debts or loans when you pass away, the cost of these loans would be taken out of your estate rather than being passed to your loved ones. But this means that there will be less in your estate for family members to inherit.

  So, when working out your cover, you might want to factor in your debts and loans. They might all be paid off by the time you die – but if they’re not, you’ve made allowances for them.

• Family expenses

  A life insurance pay-out doesn’t have to be based solely on outstanding debt. You might also want to factor in family expenses, which can include everything from helping your children cover the cost of attending university, to buying a house.

  When it comes to covering future expenses, it’s important that you take inflation into consideration. As we’ve seen over the past year or so, the economy is a volatile beast and it doesn’t take much for the cost of living to sky rocket.

• Income replacement

  When calculating how much cover to take out, a rule of thumb is to ensure a pay-out of at least 10 times the main breadwinner’s income. In theory, this should be enough to help your family cover some expenses until they find their new normal.

  Ultimately, it’s impossible to foresee everything that might affect your finances over the next five, 10 or 20 years. So, all you can go off is the here and now and hope for the best.

What else will affect your premiums?

In addition to the type of policy and the level of cover, your age and health will be the other main factors which dictate how much you pay in monthly or annual premiums for your life insurance.

Generally, those who’ve had serious medical pre-existing conditions, and smokers, pay more for cover. While there might be a temptation to put a positive spin on your health to bring down your premiums, it’s important that you’re upfront with insurers to avoid being caught out later down the road.

There are other ways to shave the cost of your life insurance such as shortening the term and using a comparison site. Our experts at QuoteSearch will do everything they can to ensure you’re getting good value for money on your life cover.

At QuoteSearch, we’re happy to get as many quotes that you need so you get cover for a reasonable price. We don’t have any favourite suppliers – the quotes that you see are comprehensive and competitive.

To compare your free life insurance quotes from leading providers, click here.